The Securities and Exchange Commission on January 10 declared effective the 19b-4 filings submitted by the New York Stock Exchange, Nasdaq and CBOE Global Markets, allowing exchange traded products (ETPs), including exchange traded funds (ETFs), that invest directly in bitcoin. Since 2004, there have been spot ETPs for other non-security commodities such as precious metals, but this is the first approval relating to a crypto asset. The SEC was clear in its statement that “[w]hile we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin.”
How did we get here?
For several prior years, the SEC declined to approve any spot bitcoin ETF applications, including that of Grayscale, which in August 2023 decided to challenge the SEC’s decision in court. The U.S. Court of Appeals for the D.C. Circuit held that the Commission failed to adequately explain its reasoning and therefore vacated the Grayscale Order. The SEC referenced this decision in its eventual approval of spot bitcoin ETFs.
What is a spot bitcoin ETF?
A spot bitcoin ETF directly tracks the value of bitcoin and trades on traditional market exchanges rather than cryptocurrency exchanges. In this case, the ETF would be backed by significant bitcoin holdings (actually held by designated custodians, such as Coinbase), and investors may gain exposure directly from their brokerage account by buying shares of the fund.
Why is this important?
A spot bitcoin ETF allows investors to gain exposure to the price movements of bitcoin on a registered national exchange rather than through a cryptocurrency exchange and without the technical hurdles associated with holding cryptocurrencies. ETFs also allow investors to avoid the management and other fees charged by investment trusts that hold bitcoin. Additionally, people with 401(k), IRA and similar retirement accounts may now be able to invest in bitcoin via an ETF.
Now that spot bitcoin ETFs have been approved and are being offered by many of the leading brokerage firms, investors that were previously hesitant to invest in bitcoin may now test the waters of cryptocurrencies by investing in an ETF, which could lead to further adoption of crypto assets generally.
What is the difference between a spot bitcoin ETF and a bitcoin futures ETF?
A spot ETF directly invests in and holds actual bitcoin whereas a bitcoin futures ETF permits the trading of paper derivatives contracts tied to the future price of bitcoin. Bitcoin futures ETFs were approved by the SEC in 2021, but these funds may or may not hold any actual bitcoin.
What's the difference between the approved ETFs?
The primary difference between the newly approved ETFs remains the fees charged, including some introductory discounts being offered. Currently, fees range from approximately 0.21% (Ark Invest) to 0.94% (Hashdex). A handful of these funds are also offering reduced or waived fees for the first 6-12 months, or until the fund reaches $1-$5 billion in fund assets, whichever comes first.
Which ETFs were approved?
On the NYSE Arca:
- The Grayscale Bitcoin Trust
- The Bitwise Bitcoin ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)
- The Hashdex Bitcoin ETF under NYSE Arca Rule 8.500-E (Trust Units)
On the NASDAQ:
- The iShares Bitcoin Trust
- The Valkyrie Bitcoin Fund under Nasdaq Rule 5711(d) (Commodity-Based Trust Shares)
- The ARK 21Shares Bitcoin ETF
- The Invesco Galaxy Bitcoin ETF
- The VanEck Bitcoin Trust
- The WisdomTree Bitcoin Fund
- The Fidelity Wise Origin Bitcoin Fund
- The Franklin Bitcoin ETF13 under BZX Rule 14.11(e)(4) (Commodity-Based Trust Shares)
Does this protect cryptocurrency investments?
Importantly, the SEC’s action is specific to ETPs holding bitcoin, and is not a broad approval of any other crypto asset (nor trading platform or intermediary), especially those that the SEC maintains may be non-compliant with the federal securities laws. However, in its January 10 statement, the SEC articulated three specific protections for investors in these ETPs that are listed and traded on registered national securities exchanges:
- Full, fair, and truthful disclosures about these products will be included in public registration statements and required periodic filings.
- In addition to the rules imposed by the exchanges to avoid conflicts of interest and protect the public interest, the SEC will monitor and investigate these exchanges for fraud. manipulation (witness the actions brought against the social media influencers in 2022).
- The SEC is in the process of reviewing registration statements for 10 spot bitcoin ETPs to “help create a level playing field for issuers and promote fairness and competition."
(Co-author credit: senior counsel John Piskora)