The U.S. Securities and Exchange Commission (SEC) has been reviewing several applications for a Bitcoin exchange-traded fund (ETF) for years, yet none have been approved. How can that be? Let’s take a closer look at it.
Spot vs. Futures ETF
There are two primary types of Bitcoin ETFs: spot and futures.
A spot ETF directly holds Bitcoin in a custodial account, reflecting Bitcoin’s current market price. In contrast, a futures ETF does not hold Bitcoin; it invests in Bitcoin futures contracts, agreements to buy or sell Bitcoin at a future date and specified price. Due to factors like supply and demand, fees, and expiration dates, a futures ETF’s value may deviate from Bitcoin’s actual price.
While the SEC has approved several Bitcoin futures ETFs, such as the ProShares Bitcoin Strategy ETF and the Valkyrie Bitcoin Strategy ETF, which have attracted billions in assets under management, it has hesitated to approve a Bitcoin spot ETF. The SEC’s concerns include potential market manipulation, fraud, custody issues, and investor protection.
The SEC’s Hesitation with Spot ETF
One key reason for the SEC’s hesitation is the lack of regulation and oversight in the underlying Bitcoin market. Unlike the futures market, regulated by the Commodity Futures Trading Commission (CFTC), the spot market is largely unregulated and decentralized. Hundreds of exchanges and platforms operate in different jurisdictions with varied transparency and security levels. The SEC fears that the spot market’s vulnerability to manipulation, hacking, theft, and other illicit activities could harm investors and undermine the ETF’s integrity.
Another concern for the SEC is ensuring the safe and reliable custody of Bitcoin. Unlike traditional assets, which trusted intermediaries like brokers and custodians hold, Bitcoin is stored in digital wallets controlled by private keys. The SEC is concerned about operational, technical, and legal risks associated with Bitcoin custody, such as loss, theft, or compromise of private keys, hacking or malfunctioning of wallets, and unclear Bitcoin ownership and liability.
Despite the SEC’s reservations, many experts advocate for the benefits of a Bitcoin spot ETF for the crypto industry and the broader financial system. Approval of a Bitcoin spot ETF by the SEC would be seen as a significant milestone and catalyst, signaling Bitcoin’s recognition and acceptance as a legitimate asset class. However, the SEC has not indicated when or if it will approve a Bitcoin spot ETF, repeatedly delaying or rejecting various ETF providers’ applications, like Fidelity, BlackRock, and Grayscale. SEC Chairman Gary Gensler has expressed a preference for a futures-based ETF over a spot-based one and has called for more authority and resources for the SEC to regulate the crypto market.
As the crypto community awaits the SEC’s decision on a Bitcoin spot ETF, interest in Bitcoin and cryptocurrencies continues to grow, as evidenced by rising prices, trading volumes, and adoption of crypto assets.”