Bitcoin ETFs: how are files prepared?

Around ten leading US financial players are preparing to launch Bitcoin ETFs. All are facing the challenge of reassuring the regulator before launching these novel products.

The race is in full swing. In the United States, more than a dozen players are in the running to try and get their Spot Bitcoin or Ethereum ETFs approved.

Although asset management giants such as BlackRock, Invesco and Franklin Templeton have applied to the Securities and Exchange Commission (SEC), the US stock market watchdog has so far not approved any of them.

The reason there is so much talk about this subject is because it would greatly democratise crypto investing and could be one of the catalysts for the market.

"Today, to gain exposure to crypto cash, retail investors have to go through an exchange platform or a hardware wallet, which is not ideal in terms of accessibility," explains Dramane Meïté, head of product at Hashdex. With a Spot ETF, investors could gain exposure to Bitcoin or Ethereum without having to hold them directly and with a simple securities account. Yes, just like stocks.

Tour d'horizon du processus 🚀.

👉 No need for a regulatory licence

"Unlike in Europe, there is no need for a specific regulatory licence to apply to launch a crypto Spot ETF in the US," explains Townsend Lansing, head of product at European asset manager CoinShares, which recently entered the race by placing an option to buy Valkyrie.

Anyone can therefore submit the "S1" application form to the SEC in an attempt to launch their Spot ETF.

But obviously, as the digital asset sector is still in its infancy, the requirements for offering crypto ETFs have yet to be invented.

👉 SEC vigilant about risks of price manipulation

The big difference with a traditional ETF structure lies in the choice of market players who will handle the buying and selling of cryptos on behalf of issuers. And the various entities on the sidelines have chosen different strategies.

Currently, no crypto exchange platform is registered as a "National Exchange" with the SEC. "This is a problem in particular for the monitoring of market data needed by the SEC to identify potential price manipulation", Townsend Lansing continues.

Coinbase, chosen by BlackRock for this task (as well as custody), therefore does not benefit from this guarantee, unlike regulated markets such as the Chicago Board Options Exchange (CBOE) or the Chicago Mercantile Exchange (CME). This could potentially motivate the regulator to reject BlackRock's project.

Second point of vigilance: the SEC needs to ensure that the chosen market place is of sufficiently "significant" size to prevent price manipulation. In plain English: to ensure that any price manipulation attempts operated on other exchanges have no impact.

"Now, Coinbase only accounts for 5% to 10% of total transactions on the bitcoin market, which is far too little to be impervious to price variations on all the exchanges that list bitcoin and participate in the formation of its price," Dramane Meïté remarks.

👉 Hashdex plans to rely on the Chicago CME

Hashdex therefore presented the SEC in mid-October with an arrangement whereby the asset manager would buy its cryptos via the Chicago Mercantile Exchange (CME), the benchmark market for futures trading, and not via a crypto platform.

More specifically, the asset manager intends to use its bitcoin "futures" ETF and then trade in "spot" via brokers regulated by the CME.

Until now, the SEC has only authorised crypto futures ETFs on the grounds that price formation is regulated since it depends on the CME. This argument is fragile insofar as the price of bitcoin offered on the CME is calculated on the basis of four crypto exchange platforms, namely Bitstamp, Coinbase, Kraken, itBit and LMAX Digital.

In September, a court ruling vindicated Grayscale, which has been seeking for several years to transform its Bitcoin Trust into a Spot ETF. A US court ruled that the SEC's refusal was "arbitrary", on the grounds that Grayscale's Spot ETF did not offer sufficient safeguards to prevent manipulation of the bitcoin price, even though it had approved futures ETFs with the same feature.

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