How The Bitcoin ETF Approval (Or Not) Process Works At The SEC – Forbes


The long awaited bitcoin spot ETF is slowly coming to fruition, but how does this process work?
The potential of a bitcoin spot ETF hitting the market has been the news that many investors, both individual and institutional are waiting for, but how exactly does that process work?
When news broke that Blackrock had filed an application for the creation of a spot bitcoin ETF with the SEC the crypto market took this, correctly, as an almost universally good thing. Although some might decry the inroads being made by TradFi institutions into the crypto space, the reality is that these are the size and type of institutions that need to be present in the market for crypto to achieve mainstream adoption.
The enthusiasm for this particular spot ETF application has exceeded the hopes for the multiple other similar applications that have been submitted recently. On October 16th, based on news that the Blackrock ETF has been approved, bitcoin jumped briefly over $30,000; when the news had proven to be false, prices quickly retreated back down to previous levels. Clearly the attitude and sentiment around cryptoassets has shifted toward institutional players, and the almost 100% success rate Blackrock has with previous ETFs continues to provide the market with optimism.
That is all well and good, but investors might be wondering just how the ETF process works, who is in charge of it, and why this has proven to be so controversial. Let’s take a look at those exact issues.
How ETFs are submitted might seem like a confusing process, given the multiple rejections and delays that bitcoin ETFs have faced, but the process is one that has been successfully completed thousands of times. The process can be summarized as follows. First the prospective ETF manager, known as the sponsor, files a plan with the SEC to create an ETF. This is where the bitcoin ETF process has been held up, as the SEC continuously rejects these proposals. In the case of recent applications, such as the one submitted by Blackrock, the sponsor and authorized participant (normally a large institutional investor) would most likely be the same entity. Assuming the application moves forward from this point, the authorized participant begins to acquire the underlying asset, places these assets in a trust, and then uses these assets to form ETF creation units.
This might sound like a complicated process, but there are nearly 3,000 ETFs in the United States that are comprised of assets worth almost $10 trillion, illustrating how unusual the steadfast rejection of bitcoin ETF applications has been.
In contrast to the trust offerings, namely the Grayscale Bitcoin Trust product, there are a few key differences that exist between these instruments and a spot ETF. First of all, trust products are generally not redeemable for the underlying asset, which helps explain why the price per underlying asset (bitcoin) can differ quite a bit from the trust product itself. A spot ETF, to the contrary, operates as an open-end fund system that has more flexibility to issue new shares, allowing it to better track the spot price of bitcoin as it moves. Additionally, spot ETFs can also deliver improved liquidity and tax treatment for investors, further highlighting the appeal these instruments have for a wide array of investors.
ETFs are approved by the SEC, and the Commission has approved thousands of such products since they were first introduced, and this is why the frustration regarding the lack of a bitcoin spot ETF has been steadily increasing. Even as other ETFs have been approved featuring relatively exotic underlying assets and business models, the SEC under Gary Gensler has remained steadfastly opposed to approving the creation of a spot bitcoin ETF despite increasing pressure from the industry and lawmakers.
The answer as to why there is no spot bitcoin ETF in U.S. markets yet is an answer that can vary depending on who is asked. In official comments and statements that SEC has reiterated that because bitcoin is such as volatile asset, the crypto industry is so rife with fraud and abuse, and that other investor protections have yet to be written, that the market is simply not mature enough to serve as the underlying asset for a ETF product.
On the other hand there are many crypto proponents who would argue that the lack of a spot ETF product is proof of the anti-crypto and anti-bitcoin position that some policymakers in the U.S. have seemingly embraced. It should come as little surprise that as the SEC files a flurry of enforcement actions and lawsuits against firms operating in the space that the Commission has also proven reluctant to allow new crypto or bitcoin products to enter the marketplace.
As the potential for a spot bitcoin ETF continues to increase, and frankly looks higher than ever before, investors and entrepreneurs should be informed as to how the ETF process works, who is involved, and why this process has been such a long time coming.


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