BlackRock Bitcoin ETF Filing: Is This The One That Finally Gets Approved By The SEC?
Will Fidelity be the ultimate winner here? Does BlackRock have a plan to get to the front of the line? What about GBTC?
Many ETF issuers have tried. VanEck, ProShares, Invesco, Valkyrie and ARK are among the ETF players that have filed to launch spot bitcoin ETFs. All have been rejected by the SEC.
But the whole landscape changed last week when BlackRock, the world's largest asset manager, filed to launch its own bitcoin ETF. There have been more than 30 different bitcoin ETF filings going back a few years and none of them have made it to market. The two big questions now are...
Does BlackRock know something that the rest of the market doesn't?
Would BlackRock be able to jump the line in terms of who would get approved first?
Bitcoin ETF Background
The reason for bitcoin ETF rejections has always been the same. The SEC is uncomfortable with the unregulated nature of the crypto space and says it's rife with the potential for fraud. That position isn't entirely unwarranted since there have been hacks and other fraudulent activities, but in terms of structure, there's really been no evidence that existing bitcoin exchange-traded products have run into problems.
First, spot bitcoin ETFs already exist, just not in the United States. There are several bitcoin ETFs currently trading in Canada, including the Purpose Bitcoin ETF, which is the largest of the bunch. Canadian regulators are generally considered a bit more mellow than U.S. regulators and have been more amenable to launching products related to things, such as blockchain and cannabis, as well. They've traded just fine.
The SEC has, however, approved bitcoin futures ETFs. Since futures contracts have already been approved by the SEC, there are dozens of other futures-based ETFs in existence and the funds don't actually invest in bitcoin, they've gotten the green light. The largest is the ProShares Bitcoin Strategy ETF (BITO) with nearly $1 billion in assets.
There's also the Grayscale Bitcoin Trust (GBTC), which has been around for nearly 10 years and has amassed more than $16 billion. Before the bitcoin futures ETFs came around in late 2021, this was THE way to add bitcoin to your portfolio if you didn't want to open a crypto wallet and buy it yourself. The problem with GBTC is that because it's organized as a trust and not an ETF, it ends up trading like a closed-end fund. That means it can trade at wildly different prices than the underlying value of the bitcoin holdings. GBTC has traded at roughly a 50% premium to bitcoin's value and it's traded at a 50% discount. It may hold bitcoin, but it's been a poor proxy for the value of bitcoin.
Isn't This A Strange Time To Be Filing For A Bitcoin ETF?
It would sure seem so.
As mentioned, there have been more than 30 different spot bitcoin ETF filings, some of which are still technically active, some of which have been rejected outright by the SEC and some which have seen their applications withdrawn. The SEC has really given no indication that its thinking or position has changed. Why would BlackRock just add its name to the rejection pile?
Plus, there's also this little nugget that makes the situation a little weirder.
Coinbase would be the bitcoin custodian for the BlackRock product. The SEC just sued Coinbase alleging that it was operating an unregulated exchange. That's a little awkward.
The BlackRock/Coinbase relationship isn't a new one though. Last year, the two partnered to bring crypto access to BlackRock's institutional clients. It's understandable why BlackRock would plan on using Coinbase again, but the timing is very curious. If every spot bitcoin ETF has failed to get approved and the SEC is suing the custodian of its proposed product, why on earth would BlackRock choose now to file?
The popular working theory is that it has some kind of inside information that perhaps the situation has changed.
What Makes The BlackRock Filing Different From The Others?
Technically, nothing really.
The BlackRock product (which is currently listed as "iShares Bitcoin Trust" on SEC filing documents) proposes to hold physical bitcoin in the manner that many previous filings also have. I've heard rumors that BlackRock added a higher degree of crypto oversight into its proposal, but I'm struggling to see how that alone would push it over the finish line.
I did come across one take on the filing that makes some sense if you're willing to dust off your conspiracy theory hat a little bit.
I kind of like this theory. The financial markets equivalent of the 3-team trade!
This obviously requires one to believe that the filing is being judged on more than just its merits. The SEC has long been uncomfortable with the Wild West aspect on the crypto markets and it's said in past ETF rejections (both related to bitcoin and blockchain) that it worries about regular retail investors being materially harmed by putting money into an asset that they don't fully understand. It's the primary reason why the initial blockchain ETFs that were approved don't have the word "blockchain" in them. The SEC worried that investors were just going to throw their money at anything tied to the hot sector of the moment.
If the SEC wins and is able to gain regulatory oversight of the crypto exchanges, there's really not much preventing them from approving a bitcoin ETF since a big obstacle would be removed. Of course, any sort of determination of what could or would fall under the SEC's regulatory umbrella is likely to involve a lengthy legal battle, so this is far from a slam dunk, but it could indicate that the SEC is closer to reaching a comfort level than it ever has in the past.
The bitcoin maximalists will HATE it if BlackRock gets bumped to the front of the line and gets the first bitcoin ETF. A lot of people already believe that BlackRock owns the world (remember, custodianship isn't the same as ownership) and can't stand the company to begin with. Can you imagine if there's the perception of corporate favoritism with this?
Will The SEC Finally Approve A Bitcoin ETF?
Until we hear that something has changed in the crypto landscape, whether that's the SEC becoming more comfortable with bitcoin & the exchanges or gaining some type of regulatory oversight, it's tough seeing how a BlackRock Bitcoin ETF would get approved where the previous filings wouldn't.
At the same time, I think there is a reason why BlackRock is filing for a crypto product here. They're not going to waste their time on this unless there's a good reason to do it. I'm just not sure what that reason is yet. The "BlackRock as a mediator for the Coinbase/SEC battle" theory is a good one, but there's also part of me that finds it a little too far-fetched.
Do I think a bitcoin ETF will eventually get approved? Yes, but the key word is "eventually". Whether that's in one year or 10 years, I don't know, but I think the SEC will get there in time.
How Does Fidelity & Grayscale Fit Into The Equation?
Fidelity is also supposedly readying its own bitcoin ETF filing. While this would be interesting in and of itself, it's the second part of the following headline that I find more intriguing.
Grayscale has already said it's going to convert GBTC into an ETF as soon as it can. So far, the SEC has rejected the conversion and Grayscale has sued the SEC in response and there's a legitimate chance that Grayscale could win once this goes to trial.
If Fidelity were to acquire Grayscale, it could become the ultimate winner in the bitcoin ETF race.
Let's say that BlackRock works its magic and gets a bitcoin ETF approved. That would, in theory, open the door for other bitcoin ETFs to also get approved. In that scenario, GBTC would likely be able to convert from a trust to an ETF, probably not too long after the BlackRock product launches.
In that event, BlackRock might get the first bitcoin ETF, but Fidelity would follow with its GBTC-converted ETF with A BUILT-IN $16 BILLION ASSET BASE! That'd be a huge win for Fidelity with its desire to be the biggest player in crypto ETFs. Even if it doesn't convert, Fidelity could still collect a 2% annual fee on the existing product. Not a bad deal either way!
Conclusion
The general consensus is that the BlackRock bitcoin ETF filing has a good chance of getting approved by the SEC.
The surveillance-sharing agreement that's part of the filing may be enough to get it over the approval hump on its own. The "I scratch your back, you scratch mine" theory between the SEC, Coinbase and BlackRock is interesting, but I have a feeling that it would also raise a lot of questions about how business is being done.
I'm just not sure that much has changed in terms of how comfortable the SEC is with crypto. If nothing has changed, I'm not sure I see how this ETF would get approved. I think there's a better chance that Fidelity buys Grayscale and assumes GBTC, but I think just about any outcome is possible at this point.