Bitcoin: All Eyes On The SEC (Cryptocurrency:BTC-USD) – Seeking Alpha

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It is now clear that one of the much-anticipated catalysts for Bitcoin (BTC-USD) in the run-up to the upcoming Bitcoin halving is the approval of a spot Bitcoin ETF. For about a year, asset managers like Fidelity have been awaiting the SEC's approval for their spot in Bitcoin ETF. The world's biggest asset manager, BlackRock's (BLK), application in June to get its spot Bitcoin ETF approved increased the hopes of such approval becoming fruitful and brought the spot Bitcoin ETF topic to the front pages.

Crypto asset manager Grayscale (OTC:GBTC) scored a popular victory against the SEC in August, when the court ruled against the SEC's decision to outrightly reject Grayscale's application to convert the largest Bitcoin trust fund, GBTC, into a spot Bitcoin ETF. The SEC was given till midnight on October 13 to appeal the court order or review Grayscale's application.

By midnight on October 13, the SEC hadn't budged. The SEC refused to appeal the August court order ruled in favor of Grayscale. The SEC's silence has left analysts wondering whether the refusal to appeal the ruling signals that an ETF approval is on the horizon or if it suggests a lack of interest and a preconceived inclination to reject Grayscale's application with minimal scrutiny.

The SEC's stance on its spot BTC ETF approval has been based on the argument that spot crypto ETFs present risks; while the SEC has approved futures ETFs whose values are based on the underlying spot prices, leaving analysts confused. This stance does not appear valid because approving futures ETFs with spot price dependencies, while rejecting spot ETFs, appears inconsistent and raises questions about the rationale behind these decisions.

It is difficult to pinpoint the SEC's main rationale for delaying a spot Bitcoin ETF approval; however, in my view, some reasons why the SEC might have been dragging its feet could be because the regulator is waiting for more comprehensive Bitcoin custody solutions and market surveillance mechanisms before deciding to approve a spot Bitcoin ETF. The SEC's concern about custody solutions for spot ETFs could be a key factor. Futures contracts are typically traded on regulated exchanges, like CBOE and CME, with established custody solutions. Spot assets involve holding actual cryptocurrencies, which may pose greater custody and security challenges.

Also, the decentralized nature of the cryptocurrency market presents some challenges in ensuring market integrity. Unlike traditional financial markets, where surveillance is more straightforward due to centralized exchanges, the opposite is the case with crypto. This absence of centralization can make it difficult to monitor and prevent the risk of market manipulation, and other risks effectively. The SEC's hesitance in approving spot Bitcoin ETFs could stem from concerns about the potential impact of these risks on retail and institutional investors. The regulator might be waiting for more robust and comprehensive market surveillance solutions and regulatory frameworks to be in place before approving a spot Bitcoin ETF, to ensure that investors can confidently participate in this emerging asset class without undue risk.

Spot ETF applicants are making notable strides in addressing the SEC's concerns regarding Bitcoin spot ETFs. Some applicants, including BlackRock, Fidelity, and Invesco (IVZ), have recently submitted an updated prospectus that provides detailed insights into key aspects of their spot ETF product, including the implementation of robust market surveillance mechanisms, enhancing the safety of assets under management, and utilizing GAAP-compliant reporting mechanisms.

BlackRock updated its spot Bitcoin ETF application one day ago. In this updated application, BlackRock addresses some of the SEC's concerns by highlighting its custody arrangements with Coinbase (COIN), Bitcoin's volatility risks, and the complexities surrounding Bitcoin's valuation. BlackRock indicated its commitment to gauge fair value and prepare the trust's periodic financial statements per the Financial Accounting Standards Board (FASB) ASC 820.

Fidelity also filed an updated ETF application one day ago. Like BlackRock's updated prospectus, Fidelity's updated ETF application mentioned using a pricing source consistent with GAAP for its financial statements, and also contained risk disclosures.

Last Monday's erroneous (now-deleted) tweet, published by Cointelegraph, stated the approval of BlackRock's spot Bitcoin ETF quickly spread throughout the crypto community and led to a significant surge in Bitcoin's price, peaking at $30,000. The market's reaction to this false news is an indication of the heightened anticipation and excitement surrounding the eventual approval of a spot Bitcoin ETF. Cointelegraph has since issued an apology for the misinformation. While this incident was an isolated case of misinformation, it highlights the potential impact that a genuine ETF approval could have. The Cointelegraph incident may well be considered the tip of the iceberg, offering a tantalizing preview of what lies beneath the surface, ready to be unlocked by the arrival of a legitimate Bitcoin ETF. This is one reason I recommend holding Bitcoin at this point, especially as the halving is approaching - another likely Bitcoin price catalyst.

The coordinated update of ETF applications by asset managers shows that talks could be going on behind the scenes between the ETF applicants and the SEC. I like the fact that these asset managers are updating their ETF applications, highlighting more of the SEC's concerns and showing their readiness to make the ETFs regulatory compliant. I believe this is the quickest route to getting a spot BTC ETF approved.

Some Bitcoin maximalists who are self-custody "advocates" believe that the introduction of investment vehicles like a spot ETF will affect Bitcoin's inherent characteristic of decentralization. I believe that for Bitcoin to become a mainstream asset with worldwide mass adoption, regulation is inevitable.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Bitcoin: All Eyes On The SEC (Cryptocurrency:BTC-USD) - Seeking Alpha