The potential launch of the first spot Bitcoin (BTC) exchange-traded fund (ETF) is more than a decade in the making, as dozens of applications have been filed with the Securities and Exchange Commission (SEC) since Tyler and Cameron Winklevoss first applied for the Winklevoss Bitcoin Trust in July 2013 – with all of them being denied by the regulator for various reasons.
That changed in 2022, when BlackRock, the largest asset manager in the world, threw its hat into the mix and helped ignite the latest cryptocurrency bull market.
While the entrance of some of the world’s largest asset managers made it seem as though an approval was all but guaranteed, the SEC has continued to request multiple amendments to the filings, prompting many to wonder if they had ulterior motives for their requests or if they were being extra diligent in making sure the first spot BTC ETF launches right.
To get a legal perspective on some of the requests by the SEC, Kitco Crypto spoke with Felix Shipkevich, a fintech regulatory attorney and Special Professor of Law at Hofstra Law School.
When asked why the SEC was so adamant about the applications outlining a process of cash-redemption model while excluding the possibility of in-kind redemptions, Shipkevich said, “Frankly, I don’t know.”
“I could speculate only that, if they have a cash out for a transaction, then perhaps, in their view, they are protecting investors by trying to limit price volatility,” he said, reiterating that this is pure speculation.
“The problem is that I think it's just going to be more costly for a consumer to have a cash-out versus an in-kind redemption,” he said. “So I'm having difficulty with understanding their exact reasoning, and can only speculate.”
He noted that there was a possibility that in-kind redemptions could lead to greater trading volumes, but said that more than anything, they would just be more costly and time-consuming.
“From my point of view, I just think it's very silly to require that,” he said. “It is very reminiscent of the theme that the SEC and Gary Gensler just really don't like a Bitcoin ETF, and they've tried to put spike strips around every curve to stop the car. It’s just another bump, and it's not a serious bump.
“It kind of resembles the tweet that Gary Gensler put out just a few minutes ago where he is warning against crypto investments,” Shipkevich said. “Why do they require cash redemption versus in-kind? Why is he tweeting this out on January 8th when the ETF looks like a done deal? Is it because his hands are now tied, and in less than two days, he has to either approve or deny.”
“This is a clear message that there's going to be an ETF that's approved because the SEC is judicially required to either approve or deny, and Gensler is the ultimate decision maker behind most of what the SEC does these days when it comes to crypto,” he said.
Shipkevich related this to road signs that remind drivers that driving while intoxicated is bad and said it's “mind-blowing” that they are at the stage where they feel the need to continue to reiterate the same risks they have for years.
“So I don't know personally why they decided to require cash redemptions, but it's just another in the line of silly nuisances that they are putting in place to approve this,” he said. “But I think it's quite certain at this point that at least one, and likely multiple spot BTC ETFs, will be approved.”
“Then the next question is what happens afterward, when the SEC starts auditing these firms, and we start getting access to a lot of the behind-the-scenes data,” he said. “They were able to audit and get access to a lot of information and data during the application process. They might have been hoping that the applications didn’t go anywhere, but that changed when the judiciary got involved and forced the issue, saying enough is enough, we need to get this either approved or denied.”
“So what is the likelihood that this will lead to a kumbaya moment?” he questioned. “Not likely. I think that this is only going to give the SEC more power to come later in 2024 and say, ‘You wanted this approved, now we’re going to come in and see what you are really doing, who your clients are, and what your trading practices are. Is your ETF involved in any trade manipulation practices?’”
“From a purely regulatory standpoint, there are a lot of unknowns,” he added. “We still don’t have certain legal and regulatory standards and the SEC would like to set those standards. So perhaps they're saying, ‘You know what, maybe we lost this battle, but we'll win a couple of other battles down the road.’”
Shipkevich said the regulatory developments around cryptocurrencies “are still in the prenatal stage, and we’re hoping that the birth will happen on January 10. But as we all know, when the birth happens, quite a lot takes place between the birth and when the child starts walking, so it takes at least a year to 18 months.”
“We’re also in an election year, so a lot may happen between now and the election in November,” he added.
Another thing to consider is Coinbase’s central role in the applications while also still facing a lawsuit by the SEC for securities violations, he noted.
“It's truly amazing the amount of resources that the SEC is throwing at the crypto space, which I understand,” he said. “It makes sense.”
Shipkevich noted that the idea of working with regulators has gotten contentious, similar to the division between political parties or other notable concepts in American society, and stressed the need for cooperation and collaboration.
He suggested that a different option from Gensler’s tweet on Monday could have been to put a tweet out on Jan. 10 saying, “We just approved an ETF, and as you know, trading in crypto is risky, so before you start investing in the spot Bitcoin ETF, here’s our guidance on this.”
“Let’s just be more professional,” he said. “The tweet from Gensler sounds like a disclaimer, fine print. Why not just be a little more genuine and a little more personal if you want to have that voice as a regulator.”
“Why not hold some type of open forum on Bitcoin ETFs and have the public input,” he asked. “It’s an exchange-traded fund by BlackRock, Fidelity, Grayscale, and other multi-billion dollar companies. This is not FTX or some random, unknown company. These are big companies. Just treat people like adults capable of making an informed decision.”
In some regards, the SEC’s protests against the spot BTC ETF have actually encouraged more people to look closer at it, and cryptos in general, he suggested. “The more they created these little nuances, the more attention the ETFs are gaining.”
“Everybody's writing about this, and the more people write about this, the more attention it gets,” he said. “The more attention it gets, the more people are attracted. ‘This must be so juicy. I want to trade this the moment it comes out. This must be the forbidden fruit.’”
“We’ve got to move on. We have more to worry about and lots of other problems to deal with,” he said. “It's time to move beyond the Bitcoin ETF discussion.”
“A year from now, people are going to come to the realization that this wasn’t as exciting or as big a deal as they are making it out to be currently,” he said.
“I think the price of Bitcoin is going to skyrocket because of the approval, just because companies like BlackRock and Fidelity are involved,” Shipkevich said. “I think they are going to make a lot of money because they are getting a lot of publicity, and then eventually, things will just fizzle out. It’s going to be like 20 years ago when ETFs became popular. Now, they are just a common investment vehicle that most people aren’t too excited about. Mutual funds were very popular in the eighties and nineties, but people don’t really care about them now.”
“What’s the next big thing” is always the mantra of the markets, he said.
Meanwhile, the U.S. debt has surpassed $34 trillion and it's getting hard for upper-middle-class people to pay for everyday necessities, he noted. “The world has bigger things to worry about than a spot BTC ETF,” he reiterated.
In closing, Shipkevich said the development that will really have a profound impact on crypto adoption is when banks start to offer access.
“It all comes down to the banks,” he said. “For crypto to become widely adopted, the banks have to offer it, period.”
