Mar 15, 2024 - Economy

Bitcoin's scarlet letter is "P"

Illustration of a light shining on a bitcoin in the dark.

Illustration: Sarah Grillo/Axios

If a pair of senators get their way, spot bitcoin ETFs will be marked with a scarlet letter "P."

Why it matters: In what might seem like a trivial battle of semantics, the label, if adhered strictly to the new exchange-traded products, has the potential to slow down the pace of adoption by causing investors to pause at the gate.

Between the lines: Sens. Jack Reed (D-RI) and Laphonza Butler (D-Calif.) are urging Securities and Exchange Commission chairman Gary Gensler to make sure no other crypto gets an ET "F" wrapper.

  • In the letter, published yesterday on social media, the senators refer to the existing bitcoin ETFs as exchange-traded products — known as ETPs, an umbrella category that includes ETFs — and ask that regulators make sure others identify them that way.
  • And specifically not as "funds."

Context: This boils down to how spot bitcoin ETFs were approved.

  • Because they were a new and different type of thing, they were approved under the Securities Act of 1933 — which per Wall Street convention would make them ETPs.
  • ETFs, by contrast, get approved under the Investment Company Act of 1940.

The big picture: The term ETF is the one most well-known in the U.S. and has become synonymous with an easy and efficient way to trade.

  • That naming convention might seem especially confusing with the new bitcoin ETFs, as some issuers call their ETPs, ETFs — BlackRock and Fidelity filings show stricter adherence, labeling theirs a bitcoin "trust."

What we're watching: The senators' letter could be a hurdle for spot ETH approval.

  • They wrote that they don't believe other crypto have "the trading volumes or integrity" to get an investment wrapper like BTC did.
  • The intrigue: While they didn't explicitly name ether, they're the only pending applications for a spot crypto investment product under consideration at the SEC, and the letter lands just before a deadline for an SEC decision.

Zoom out: Securities lawyers and ETF experts generally seem to agree the letter is a bit... bananas, in more ways than one.

  • One lawyer said there is no technical reason that makes the term ETF unsuitable to be used by a non-1940 act product.
  • Separately, Bloomberg's Eric Balchunas and James Seyffart wondered how two senators had the time to get the data to do a minute-by-minute correlation analysis to say that other crypto shouldn't get an ETF wrapper.

When Axios asked the SEC whether there was a technical reason for the name "ETF" to be unsuitable for non-1940 act products and whether the letter would factor into the commission's decision on ether ETFs, a spokesperson for the agency said via email:

  • "Chair Gensler will respond to Members of Congress directly."
  • Emails to the senators' spokespeople were unanswered.

The bottom line: While thin on details, this latest development doesn't help the odds of a spot ETH ETF approval like we said earlier this week.

Go deeper