The U.S. Securities and Exchange Commission's (SEC) decision on approving a spot Bitcoin Exchange-Traded Fund (ETF) has been a topic of intense debate and speculation. Despite the market sentiment and revealed hints of an approval by 1/10/2024, there’s still some chance of delay or rejection that we need to be aware of. Also, participants tend to believe big money will soon pour in after approval and launch of bitcoin spot ETF, but I would like to remind them of the macro conditions and crypto-specific hurdles that don’t validate a big pump just yet.
There also remains a strong chance that this is a “sell the news” type of event. Recall that Bitcoin price only pumped a few days after the US Futures based bitcoin ETF in October 2021 then dumped and entered the brutal bear market. Crypto participants may have a positively biased view about this matter as we who are on this boat naturally hope for the best and try to find positive evidence to support the view of approval and pump. However, more objective views are that only 39% predict spot bitcoin ETF approval by SEC in 2024, according to a survey conducted by Bitwise and VettaFi. Below, I analyze the reasoning of these opinions by considering regulatory concerns, market manipulation and market maturity, the role of cryptocurrencies in sanctions evasion and terrorism financing, legal challenges, and the impact of unsettled legal cases around crypto.
- Market Manipulation and Fraud Risks:
Regulators’ primary concerns include potential market manipulation and fraud. A study led by Professor Will Cong revealed that over 70% of the reported volume on certain unregulated exchanges was attributed to wash trading, indicating prevalent market manipulation. The SEC and many regulatory agencies will consider this type of evidence when evaluating broad access such as ETF. The wipeout of Luna/UST, the collapse of FTX, and the resulting bankruptcies still do not have a clear sense of recovery for investors’ money. The challenge of ensuring transparent and accurate information in the rapidly evolving crypto market underscores the SEC's concerns. How does the SEC forget their mandate of protecting investors, particularly retail investors? Or do they just support the financial institution's old money while being against the crypto native's new money?
- Lack of Robust Regulatory Framework:
The absence of a comprehensive regulatory framework in the cryptocurrency market is a significant concern, given the need for market surveillance and investor protection mechanisms. The CFTC and SEC seemed to have a basic agreement of oversight, but are still not so clear yet. Fincen and other agencies still have major concerns about the space beyond their action towards Binance. The rules aren’t clear, and broad access or adoption may not yet be ready. Also, the SEC oversees a much larger array of assets compared to the CFTC, with the total value of assets under the SEC's purview easily exceeding $100 trillion. Thus, the decision by the SEC will take more rigorous considerations and thus could take more time.
- SEC Commissioners’ Views
The spot ETF approval will have to go through voting from 5 SEC commissioners. While we don’t know the exact weighting and procedures of the voting, we can see from historical records that not all, or even a majority of these commissioners are pro-crypto, so there’s a chance on the downside:
Gary Gensler (Chair): Before his role at the SEC, Gensler was known for his knowledge of blockchain and cryptocurrencies, having taught courses on the subject at MIT. However, as SEC Chair, he has emphasized the need for more stringent regulations to protect investors in the crypto markets.
Hester Peirce: Often referred to as "Crypto Mom," Peirce is known for her positive stance towards cryptocurrencies. She has criticized the SEC for its reluctance to approve Bitcoin ETFs and has advocated for a more progressive approach to crypto regulation.
Mark T. Uyeda and Jaime Lizarraga: They have not yet established a widely known or clear stance on cryptocurrencies. Since they are relatively new to the role, there isn't extensive public information available on their views towards cryptocurrencies.
Caroline A. Crenshaw: Aligns with the SEC's cautious approach, emphasizing regulatory compliance and investor protection against issues like market manipulation and various risks.
So, to summarize, within the 5 commissioners, we seem to have a half-half split in their views of supporting crypto.
- Crypto's Role in Sanctions Evasion and Terrorism
Terrorism Financing: Cryptocurrencies have been accused of financing terrorist activities, such as recently raised concern by some congress members that Hamas has been reported to receive substantial cryptocurrency funding for its attacks. This case is still under investigation.
Sanctions Evasion: Cryptocurrencies are also used in evading sanctions, particularly highlighted in the context of the Russia-Ukraine conflict, which US regulators have been criticizing.
These are sensitive topics that may prevent the SEC from taking a progressive step at this moment, especially in an election year, and politicians may consider carefully their personal reputation and career records.
- Market De-Risk Pattern and Cautious Stance
The idiom is to not only look at what someone ways, but also look at what they do. Recently many Bitcoin and Ethereum whales have taken profit and exited the market. The turnover rate of trading is high, and the riskier altcoins experienced a dump over the weekend. All these are the signs that some traders are cautious about the approval and elected to de-risk their positions, or they suspect even if it gets approval there’s a possible market dump given the comprehensive market conditions. And there’s a conspiracy theory that the narrative of Bitcoin ETF approval has long been a tool to manipulate the market, as long as it’s not confirmed, manipulators can use it to sway the market expectations and hence pump and dump the market to make money.
The SEC's delay in approving a spot Bitcoin ETF is possible and may be attributed to a combination of regulatory concerns, investor protection focus, market maturity, commissioners’ views, legal challenges, and the role of cryptocurrencies in sanctions evasion and terrorism financing. The delay or rejection can lead to a 20+% market pullback in a few days and can accompany more bearish factors such as less than expected fed rate cuts, which could crash the market even further, leading to a quarter-long market correction that may bring Bitcoin to the $25-30K range.
The timeline for approval, likely extending into the second half of 2024 or beyond, reflects the SEC’s need to balance investor protection with market innovation while navigating a complex and evolving regulatory landscape. And even if it gets approved now, a significant money inflow and market pump may not sustain too long given the macro conditions, and may dump to liquidate the leveraged longs and re-test the low supports first before it moves back up to initiate a full bull cycle.