Is a Change to ‘Exchange’ Definition Key to Bitcoin ETF Approval?

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  • The pro­pos­al to broad­en the def­i­n­i­tion of an exchange could help spot bit­coin ETF approval by mid-2023, accord­ing to Bloomberg Intel­li­gence analysts
  • Bit­wise Asset Man­age­ment Chief Invest­ment Offi­cer Matt Hougan says there is a path­way to approve a spot bit­coin ETF with­out this change

ETF issuers in the US con­tin­ue vying to launch a fund that would invest in bit­coin direct­ly, but Bloomberg Intel­li­gence ana­lysts pre­dict one won’t be approved until cryp­to plat­forms are forced to com­ply with Secu­ri­ties and Exchange Com­mis­sion (SEC) rules.

A rule change pro­posed by the SEC could be the key to a spot bit­coin ETF approval by the mid­dle of 2023, Eric Balchu­nas and James Seyf­fart said in a research note pub­lished Thursday. 

The SEC pro­posed to broad­en the def­i­n­i­tion of an exchange in the Secu­ri­ties and Exchange Act of 1934 to include “sys­tems that offer the use of non-firm trad­ing inter­est and com­mu­ni­ca­tion pro­to­cols to bring togeth­er buy­ers and sell­ers of secu­ri­ties,” accord­ing to a Jan­u­ary 26 fil­ing

“Expand­ing the def­i­n­i­tion of an exchange could elim­i­nate the agency’s pri­ma­ry objec­tion to the prod­ucts by bring­ing cryp­tocur­ren­cy plat­forms under the SEC’s reg­u­la­to­ry frame­work,” the Bloomberg Intel­li­gence ETF ana­lysts wrote.

The SEC most recent­ly delayed its deci­sion to rule on the pro­posed bit­coin ETFs by NYDIG and Glob­al X ear­li­er this month.

“The com­mis­sion has con­sis­tent­ly required that the list­ing exchange have a com­pre­hen­sive sur­veil­lance-shar­ing agree­ment with a reg­u­lat­ed mar­ket of sig­nif­i­cant size relat­ed to bit­coin, or demon­strate that oth­er means to pre­vent fraud­u­lent and manip­u­la­tive acts and prac­tices are suf­fi­cient to jus­ti­fy dis­pens­ing with the req­ui­site sur­veil­lance-shar­ing agree­ment,” the SEC wrote in its March 10 deci­sions on the NYDIG and Glob­al X appli­ca­tions. “The list­ing exchange has not met that require­ment here.”

The SEC won’t approve a spot bit­coin ETF with­out new reg­u­la­tion or sur­veil­lance agree­ments between tra­di­tion­al and cryp­to exchanges, Balchu­nas and Seyf­fart explained.

“Tra­di­tion­al exchanges such as the NYSE would find it almost impos­si­ble to secure such accords with every exchange that offers bit­coin trad­ing absent offi­cial reg­u­la­tion,” they added. 

“The pro­pos­al to broad­en the def­i­n­i­tion of an exchange would force cryp­to plat­forms to com­ply with SEC rules, poten­tial­ly sat­is­fy­ing the agency’s over­sight concerns.”

The Bloomberg ana­lysts expect the change to be final­ized some­time between Novem­ber 2022 and May 2023.

Fund groups weigh in 

Leah Wald, CEO of Valkyrie Funds, said that based on her company’s inter­ac­tions with reg­u­la­tors, it makes sense that this would be the final hur­dle to overcome.

“They have said all along that they would be hes­i­tant to put an unreg­u­lat­ed prod­uct into a reg­u­lat­ed fund wrap­per,” she told Blockworks.

“Bring­ing dig­i­tal asset exchanges into the fold would remove that objec­tion and like­ly clear the path for a spot bit­coin ETF.”

Wald said that while it is tough to pre­dict when the SEC could approve such a fund, she does not expect the agency to do so before next summer.

But Matt Hougan, chief invest­ment offi­cer of Bit­wise Asset Man­age­ment, argued that while the rede­f­i­n­i­tion of an exchange could have big impli­ca­tions, there is a path­way to approve a bit­coin ETF with­out this change.

The SEC’s rules do not require that the mar­ket for the under­ly­ing spot com­mod­i­ty be reg­u­lat­ed and sub­ject to sur­veil­lance agree­ments pri­or to approv­ing an exchange-trad­ed prod­uct (ETP), he explained. Instead, the agency requires that there is a “reg­u­lat­ed mar­ket of sig­nif­i­cant size” that can be sur­veilled as a way of gain­ing proxy sur­veil­lance of the mar­ket as a whole.

“We and oth­er appli­cants believe that the CME bit­coin futures mar­ket is a ‘reg­u­lat­ed mar­ket of sig­nif­i­cant size,’ and believe we have demon­strat­ed this in our appli­ca­tions,” Hougan told Blockworks.

“I con­tin­ue to think the SEC can and will approve a bit­coin ETF pri­or to redefin­ing what an exchange is.”

Valkyrie and Bit­wise are among the swathe of issuers that have not been able to get their pro­posed bit­coin ETPs approved. The SEC, how­ev­er, has approved sev­er­al ETFs invest­ing in bit­coin futures con­tracts, includ­ing one from Valkyrie.

Exec­u­tives at sev­er­al fund groups recent­ly told Block­works they thought Pres­i­dent Biden’s exec­u­tive order on dig­i­tal assets could be a bull­ish indi­ca­tor for spot bit­coin ETF approval.

Grayscale Invest­ments is try­ing to con­vert its Bit­coin Trust (GBTC) to an ETF. Pub­lic com­ments have rolled in from investors and cryp­to com­pa­nies exec­u­tives, many of which sup­port­ing the move. The SEC is expect­ed to rule on the con­ver­sion by July, after a 240-day review period.

The biggest impact of the rede­f­i­n­i­tion of an exchange, if it occurs, would be on the prospects for non-bit­coin cryp­to ETFs, Hougan said. 

“If Coin­base were reg­u­lat­ed and if it could have sur­veil­lance tech­niques in place,” he not­ed, “you could build ETPs on a wide vari­ety of cryp­to assets, or cryp­to index ETFs.


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  • Ben Strack
    Ben Strack is a Den­ver-based reporter cov­er­ing macro and cryp­to-native funds, finan­cial advi­sors, struc­tured prod­ucts, and the inte­gra­tion of dig­i­tal assets and decen­tral­ized finance (DeFi) into tra­di­tion­al finance. Pri­or to join­ing Block­works, he cov­ered the asset man­age­ment indus­try for Fund Intel­li­gence and was a reporter and edi­tor for var­i­ous local news­pa­pers on Long Island. He grad­u­at­ed from the Uni­ver­si­ty of Mary­land with a degree in journalism.

    Con­tact Ben via email at [email pro­tect­ed]

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