Jul 18, 2022 - Economy

Spot bitcoin ETF approval hinges on big ask

Illustration of a security camera with a glowing bitcoin symbol on the lens

Illustration: Natalie Peeples/Axios

The straight path to get folks in the U.S. direct access to bitcoin via an easy button would be for exchanges to submit to surveillance.

Why it matters: That would address the Securities and Exchange Commission's ask for a spot bitcoin ETF, but it's a big one. The ask is something of an unpopular proposition, bordering on unreasonable without more specificity, crypto industry leaders tell Axios, speaking under conditions of anonymity.

Context: A spot bitcoin ETF is one that can be bought on a standard securities exchange, and based on the actual price of bitcoin (not a derivative futures price, as some exist currently).

What they're saying: The SEC wants proof that spot bitcoin ETF prices would be based on bitcoin markets that are “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”

There's a way to prove that, Dave Nadig, financial futurist at VettaFi, tells Axios.

  • "To be clear this is SEC Chair Gensler's idea, not mine," Nadig said. "It’s been a footnote in every single rejection since the Winklevoss' rejection. This is a get out of jail free card."

How it works: Exchanges would register with the SEC and turn over information— the who, what, when and where — so that if something goes bump in the middle of the night, regulators could figure out the why.

  • The SEC said the way forward would be via a "comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets."
  • The New York Stock Exchange, the Nasdaq and other trading platforms already do this per the Exchange Act which constitutionally delegates authority to the SEC to regulate and enforce them.

The other side: "Obviously it would be a huge pain in the you know what. There are really obvious reasons for not wanting to do so," Nadig said.

  • The SEC hasn't laid out the details. Without that specificity, exchanges don't know whether they can logistically comply with that ask, industry leaders say.

Our thought bubble: The prospect of a bitcoin spot ETF isn't likely to drive big digital-asset exchanges to subject themselves to the level of scrutiny the SEC requires, given it's not even a sure thing they would be able to list such an ETF on their marketplaces.

  • Be smart: Let's pretend for a moment that the SEC is a high-school principal, and crypto exchanges group of popular students who feel she has it out for them. Asking those students to volunteer their private Instagram accounts and also all their friends' data is a bewildering ask.

State of play: The SEC and ETF issuers appear to have reached an impasse, pushing Digital Currency Group's Grayscale Investments to pursue legal action in the hopes that the regulator's decision be overturned.

  • While that plan runs its course, other firms are refiling applications in the face of serial rejection that began with the SEC's blocking of the Winklevoss twins' application circa March 2017.

The intrigue: SEC Commission Hester Peirce in a public speech in June pointedly called out the regulator:

  • "The Commission’s willingness to be persuaded, though, turns on whether the Commission’s primary concern is legal and logical coherence with our approvals of bitcoin futures products and other commodity-based products and not, say, using the prospect of a spot bitcoin ETP approval as an inducement to get exchanges to come in and register."

Of note: Far from law enforcement and regulators lacking visibility, the advocacy group Access Now has called the present a "golden age of surveillance."

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