BlackRock's application for a spot bitcoin ETF triggers a chain reaction, an overview of the SEC review process

By Greg Cipolaro, Director of Global Research, NYDIG

Compilation: WEEX Blog

Abstract: In view of the advantage of the first mover "winner takes all", the recent spot bitcoin ETF competition is reasonable. From the experience of the Bitcoin Futures ETF (BITO), the first approved BITO controls 93% of the existing fund size under management (AUM), or $1.13B.

Read the synopsis:

1. BlackRock kicks off a new spot bitcoin ETF competition, outlining subsequent review steps.

2. There is no response deadline for recent filings because the exchange's proposed rule change has not yet been published in the Federal Register.

3. While the approval of BlackRock’s application is far from certain, its filing has had knock-on effects for other financial products such as the Grayscale Bitcoin Trust and the Ark 21Shares Bitcoin ETF.

BlackRock Tries to Launch a Spot Bitcoin ETF

On June 15, BlackRock, the lead promoter of exchange-traded funds (ETFs), kicked off the approval process for a spot bitcoin ETF, the iShares Bitcoin Trust, which manages $2.4T of ETF products. BlackRock filed the fund's registration statement (S-1) with the Securities and Exchange Commission (SEC), and Nasdaq Stock Market LLC (Nasdaq) filed a 19b-4 filing that requested the SEC to change its rules so that List and trade spot Bitcoin ETFs. In order to list the new ETF, the exchange needs to obtain an exemption from the SEC, but so far, for the spot bitcoin ETF, the SEC has refused to provide an exemption, making it unavailable to investors.

What makes this spot bitcoin ETF filing notable is that BlackRock has a near-perfect record of getting ETF approvals (255 of 256 successful), which is in line with the SEC's rejection of spot bitcoin ETFs. (rejected 28 of 28) in contrast. Investors took the industry giant's filing as a positive sign, and bitcoin prices jumped more than 20% following the news (BTC rose 10.28% on June 21, June 16-23, according to data from the WEEX trading platform). daily cumulative increase of 19.06%). While BlackRock's latest filing seeks to address the deficiencies of previous filings with a Supervisory Sharing Agreement (SSA), a partnership between an unnamed cryptocurrency exchange (reportedly likely to be Coinbase) and Nasdaq, to To detect and prevent fraudulent and manipulative trading practices, but this does not guarantee the success of the application.

WEEX Note: SSA (Surveillance Sharing Agreement) aims to increase the effectiveness of financial market surveillance, especially when financial products such as ETFs are involved. The agreement establishes a partnership that allows information and data to be shared between exchanges and regulators to better detect market manipulation, fraud and other trading misconduct.

This article does not intend to defend the positions of either party in this regulatory game, but instead we believe it may be more meaningful to outline the steps the application process will take and the implications for spot Bitcoin and other financial products.

Review Process Overview

The birth of a spot bitcoin ETF began with the filing of a registration statement with the SEC on Form S-1 (under the Securities Act of 1933). Note that this differs from the process for (most) ETFs previously approved in the US, such as the popular ProShares Bitcoin Strategy ETF (BITO), which holds Bitcoin futures traded on the Chicago Mercantile Exchange (CME) contract and filed a Registration Statement on Form N-1A (under the Investment Company Act of 1940). There is already an approved ETF under the Securities Act of 1933, the Teucrium Bitcoin Futures Fund.

WEEX Note: In April 2022, the SEC approved the application of fund issuers Teucrium and NYSE Arca to issue bitcoin futures ETFs, making Teucrium join the ranks of bitcoin futures ETFs of ProShares, Valkyrie and VanEck. But unlike several others, Teucrium filed under the Securities Act of 1933, not the Investment Company Act of 1940.

Traditionally, after filing a registration statement with the SEC, a stock exchange proposing to trade an ETF files a proposed rule change on Form 19b-4 to seek an exemption from the SEC. As mentioned earlier, exchanges need a waiver from the SEC to list new ETFs. Normally, there is a delay between filing the registration statement and 19b-4, but in the case of BlackRock iShares Bitcoin Trust, they were filed on the same day, perhaps to take advantage of news of the filing, perhaps by CoinDesk on June 15 Promoted by the revelations early in the morning. Currently, all outstanding spot ETF applications are proposed for trading on one of three exchanges: Nasdaq, Chicago Board Options Exchange (CBOE) BZX or NYSE Arca.

Currently there is no clear timetable for the approval of BlackRock ETFs

As is customary, after an exchange publishes 19b-4 (on its website), the SEC posts a notice on its website seeking comment on the proposed rule change, complete with a summary of the proposal. Likewise, there may be a delay of several days before the 19b-4 is filed and the notice of submission is filed.

It is worth noting that after all these documents have been submitted, the countdown to approval or rejection has not yet started. This is a common misconception.

Only when the SEC’s filing notice is published in the Federal Register does the countdown to the SEC’s need to respond to the exchange’s proposed rule change begin. The Federal Register is the official gazette of the U.S. government and contains government agency rules, proposed rules, and announcements other than the countdown to approval upon filing 19b-4 (see Title 78 of the United States Code - Registration, Responsibilities, and Oversight of Self-Regulatory Organizations , WEEX only note). Once the notice of filing is published in the Federal Register, the 240-day clock starts ticking, with response deadlines occurring at intervals of 45, 45, 90, and 60 days (in that order).

The SEC can defer a decision on an ETF application up to 3 times, seeking comment or providing additional information, before making a final decision on whether to approve or reject the rule change. It reserves the right to approve or deny applications at any time during the process, but historically, all applications involving spot ETFs have gone through the bulk of the 240-day process before being ultimately rejected. So there is an argument that if the SEC delays its decision on the BlackRock ETF's first response deadline (which has yet to be set), it means the application will ultimately be rejected. This may be true, but there are exceptions, the Teucrium ETF went through almost the entire 240-day process, which included 3 delayed decisions, but ultimately passed.

While we have no doubt that the BlackRock iShares Bitcoin Trust’s notice of rule change filing will eventually be published in the Federal Register, it’s worth noting that as of this writing, the notice has not yet been published, so the approval/denial/delay process is unclear at this point schedule.

GBTC's negative premium narrows, and other funds are competing to apply

Complicating matters further is the existence of two other funds: the Ark 21Shares Bitcoin ETF and the Grayscale Bitcoin Trust. The Ark Fund's planned listing on the CBOE BZX exchange was previously rejected, but was recently reapplied and was listed in the Federal Register on 5/15/23. The SEC delayed its decision - on the same day (June 15) that BlackRock filed its S-1 and Nasdaq filed its 19b-4, but the exchange filed an amended 19b-4 this time, with Including the spot bitcoin SSA (Supervisory Share Agreement), again seen as key to BlackRock's filing. The next deadline for the SEC to respond to the Ark Fund is Aug. 13, with BlackRock likely to follow after that.

WEEX Note: 21Shares, the issuer of cryptocurrency trading products, originally submitted applications for spot bitcoin ETFs in May 2021 and 2022, but both were rejected. On April 25 this year, 21Shares cooperated with Ark Invest led by Cathie Wood (Wood Sister) to resubmit the application for the spot Bitcoin ETF. Oversight sharing agreement, similar to that filed by BlackRock.

As for the Grayscale Bitcoin Trust (GBTC), there is pending litigation between the SEC and Grayscale, with Grayscale suing regulators for rejecting its attempt to convert the fund into an ETF. A three-judge panel heard oral arguments on March 7 and is expected to issue a ruling this fall, though a date was not specified. Regardless of the outcome, both parties are likely to appeal the ruling, delaying a final determination on whether GBTC can be converted into an ETF.

Regardless, news of BlackRock’s filing raised expectations among traders about the prospect of a spot Bitcoin ETF approval, sending GBTC prices surging. Before the filing, GBTC was trading at a 43.8% discount to the fund's net asset value (NAV). As of Wednesday's close, that discount narrowed to 31.6%, a change of +11.7%. In theory, if GBTC could be converted into an ETF, it should trade close to its net asset value, given the redemption and creation mechanisms associated with ETFs.

WEEX added: GBTC was traded above NAV, and the highest premium occurred at the end of 2017, when the premium exceeded 130%. However, times have changed, and at the beginning of 2021, GBTC began to enter a negative premium. Grayscale also tried to change this GBTC into a spot bitcoin ETF, but was rejected by the SEC.

Conclusion

While we understand the market's enthusiasm for the long-sought-after spot Bitcoin ETF, we need to be reminded that there is still a long way to go. While this round of applications has more hope of success than previous rounds, it is far from guaranteed. Just last week, the Wall Street Journal reported that the SEC had told ETF filers that their filings lacked clarity about the SSA.

In view of the advantage of the first mover "winner takes all", the recent spot bitcoin ETF competition is reasonable. From the experience of the Bitcoin Futures ETF (BITO), the first approved BITO controls 93% of the existing fund size under management (AUM), or $1.13B.