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SEC Could Shape Crypto History with Approval of First Spot Bitcoin ETF in the New Year


In the fast-evolving world of cryptocurrency, the Securities and Exchange Commission (SEC) is poised to make history by potentially approving the first "spot" bitcoin exchange-traded fund (ETF) in early January. This development has garnered increased confidence from major money management firms, including industry giants like BlackRock and Fidelity. However, while the prospect of SEC approval signals a significant step towards mainstream cryptocurrency adoption in the United States, there are notable controversies surrounding the proposed ETFs, particularly regarding the use of cash in transactions.

Approval Timeline and Key Players:

According to sources familiar with the matter, the SEC is expected to provide a decision by January 10, 2024. The primary contender for the first spot bitcoin ETF is Cathie Wood's Ark Investment Management in collaboration with 21Shares. Other major financial institutions, including BlackRock and Fidelity, have also submitted applications for spot bitcoin ETFs, reflecting the growing interest and confidence in the crypto market.

Potential Benefits of Spot Bitcoin ETFs:

If approved, a spot bitcoin ETF could offer retail investors enhanced exposure to the world's largest cryptocurrency at a lower cost compared to existing bitcoin ETFs tied to futures markets. Additionally, investors could access bitcoin through regulated money management firms on traditional stock exchanges, such as the New York Stock Exchange and Nasdaq, reducing reliance on unregulated platforms.

SEC Chairman Gary Gensler's Changing Stance:

SEC Chairman Gary Gensler, historically cautious about endorsing cryptocurrency, has shown a more open attitude following a ruling by the U.S. Court of Appeals for the D.C. Circuit. The court's decision limited Gensler's regulatory authority over crypto, prompting a shift in his approach. The potential approval of spot bitcoin ETFs reflects this changing regulatory landscape.

Controversy Over Cash-Based Transactions:

While the SEC's approval of spot bitcoin ETFs is anticipated, controversy surrounds the regulatory demand for cash transactions rather than using bitcoin itself. The SEC insists that applicants utilize cash to purchase ETF shares, deviating from the standard "in-kind" transactions allowed by conventional ETFs. This approach requires ETF issuers to exchange bitcoin for cash in every transaction, presenting a longer and more complex process.

Concerns Raised by Industry Players:

Several market participants, including Grayscale, have expressed reservations about the SEC's insistence on cash transactions. Grayscale, in a meeting with the SEC, argued that offering both in-kind and cash creations would benefit investors, fostering a more efficient market structure. Critics argue that the SEC's preference for cash transactions places a burden on authorized participants (APs), potentially limiting competition among issuers.

SEC's Rationale for Cash-Based Transactions:

The SEC's insistence on cash redemptions over in-kind transactions has sparked speculation about the commission's motives. Some industry experts, such as Dave Weisberger, CoinRoutes co-CEO, suggest that the SEC's decision stems from its current prohibition of broker-dealers like Robinhood and Fidelity from directly trading spot bitcoin. The concern over potential illicit activities, including money laundering and market manipulation, is cited as a reason for the SEC's cautious approach.

BlackRock's Pursuit of SEC Approval:

BlackRock, with over $9 trillion in assets under management, has prioritized obtaining SEC approval for its proposed spot bitcoin ETF. The company's founder and CEO, Larry Fink, has positioned bitcoin as an "international asset" and a "store of value" comparable to gold. Despite meeting with the SEC multiple times, the approval of BlackRock's application remains uncertain.

Precedent Set by D.C. Court of Appeals:

The industry is closely watching the D.C. Court of Appeals' ruling in August, which vacated the SEC's denial of Grayscale's application. The court deemed the SEC's actions "arbitrary and capricious," setting a significant precedent for other money managers seeking approval for spot bitcoin ETFs. This ruling underscores the potential legal challenges the SEC may face if it denies current applications.

Conclusion:

The SEC's potential approval of the first spot bitcoin ETF represents a pivotal moment for cryptocurrency adoption in the United States. However, the controversy surrounding the use of cash in transactions introduces complexities and raises concerns among industry participants. As the January 10 deadline approaches, the crypto community and financial markets eagerly await the SEC's decision, which could reshape the landscape for cryptocurrency investments and further define the regulatory framework for digital assets in the U.S.

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