ARK Invest and 21Shares, two prominent firms in the cryptocurrency space, have recently updated their joint application for a spot Bitcoin exchange-traded fund (ETF) in response to the feedback from the U.S. Securities and Exchange Commission (SEC). The revised filing indicates that the firms have addressed some of the key concerns raised by the regulator and are hopeful of getting approval in the near future.
What is a spot Bitcoin ETF and why is it important?
A spot Bitcoin ETF is a type of investment product that would allow investors to buy and sell shares of a fund that holds actual bitcoins in custody. Unlike futures-based Bitcoin ETFs, which track the price of Bitcoin contracts traded on regulated exchanges, a spot Bitcoin ETF would reflect the actual market price of Bitcoin on the blockchain.
A spot Bitcoin ETF would provide several benefits to investors, such as:
- Lower fees and higher liquidity than other Bitcoin investment vehicles, such as trusts or funds.
- Easier access and greater exposure to Bitcoin for retail and institutional investors, especially those who are restricted from buying cryptocurrencies directly or face regulatory hurdles.
- More transparency and security for investors, as the fund would be subject to strict oversight and auditing by the SEC and other authorities.
- More legitimacy and adoption for Bitcoin as a mainstream asset class, as a spot Bitcoin ETF would signal the recognition and acceptance of cryptocurrencies by the U.S. financial system.
What are the challenges and prospects of getting a spot Bitcoin ETF approved?
The SEC has been reluctant to approve a spot Bitcoin ETF, citing various risks and challenges associated with the cryptocurrency market, such as:
- Price volatility and manipulation, as Bitcoin prices can fluctuate significantly and are influenced by various factors, such as supply and demand, news events, technical issues, or malicious actors.
- Lack of regulation and standardization, as Bitcoin operates on a decentralized network that is not governed by any central authority or uniform rules.
- Custody issues and cybersecurity threats, as holding and storing bitcoins requires sophisticated technology and security measures that can prevent theft, loss, or hacking.
However, the SEC has also shown some signs of openness and progress towards approving a spot Bitcoin ETF, such as:
- Seeking public input and feedback, as the SEC has invited comments from interested parties on various aspects of a spot Bitcoin ETF, such as its structure, valuation, custody, trading, and risks.
- Engaging in dialogue and reviewing applications, as the SEC has acknowledged receiving several applications for a spot Bitcoin ETF from different firms and has initiated discussions with some of them to address their concerns.
- Facing legal pressure and market demand, as the SEC has been challenged by some applicants in court for delaying or denying their applications without sufficient reasons. Moreover, the SEC has also witnessed the growing popularity and success of Bitcoin ETFs in other countries, such as Canada or Brazil.
How did ARK Invest and 21Shares revise their Bitcoin ETF application?
ARK Invest and 21Shares are two of the leading firms that have applied for a spot Bitcoin ETF in the U.S. ARK Invest is an investment management company founded by Cathie Wood, known for her bullish views on disruptive technologies such as cryptocurrencies. 21Shares is a Swiss-based firm that specializes in issuing crypto-related products, such as ETPs (exchange-traded products) or ETCs (exchange-traded commodities).
The two firms filed their joint application for a spot Bitcoin ETF in June 2023, under the name ARK 21Shares Bitcoin ETF. The proposed fund would trade on the Cboe BZX Exchange and would use Coinbase Custody as its custodian.
On October 11, 2023, the two firms amended their application in response to the feedback from the SEC. The updated filing includes several changes and additions that aim to address some of the key issues raised by the regulator, such as:
- Clarifying the NAV calculation, as the filing states that the fund’s net asset value (NAV) would be calculated based on the volume-weighted average price (VWAP) of Bitcoin across five major exchanges: Coinbase, Bitstamp, Gemini, itBit, and Kraken. The filing also notes that this method is not in accordance with the Generally Accepted Accounting Principles (GAAP), which is an accounting standard used by the SEC.
- Explaining the custody procedures, as the filing details how the fund would hold its bitcoins in segregated accounts on the blockchain, commonly referred to as wallets. The filing also states that these accounts would not be commingled with corporate or other customer assets and that Coinbase Custody would provide insurance coverage for up to $500 million against theft or loss.
- Highlighting the valuation methods, as the filing describes how the fund would value its bitcoins based on the market prices provided by the CryptoCompare Index, which is a reputable and independent data provider. The filing also states that the fund would use a third-party pricing agent, CF Benchmarks, to verify the accuracy and reliability of the prices.
- Disclosing the risk factors, as the filing lists various risks that could affect the performance and value of the fund, such as market volatility, regulatory uncertainty, operational issues, or environmental concerns. The filing also warns that if Bitcoin is increasingly used for illegal purposes or if Bitcoin mining’s environmental impact causes it to be restricted, then the fund’s value could fall.
What are the implications and expectations of the revised Bitcoin ETF application?
The revised Bitcoin ETF application by ARK Invest and 21Shares is seen as a positive sign of progress and potential approval by some analysts and experts. For instance, Bloomberg senior ETF analyst Eric Balchunas said that the changes could be in direct response to the SEC’s comments and that they indicate a proactive dialogue with the regulator. He also said that none of the comments were new or insurmountable and that the ball is now back in the SEC’s court.
Similarly, Bloomberg ETF analyst James Seyffart said that the amendment signals that ARK Invest and others are communicating with the SEC about what the regulator wants cleared up. He also said that this is a good sign for future approval.
However, there is still no guarantee or timeline for when the SEC will approve a spot Bitcoin ETF, as the regulator has delayed or rejected several applications in the past. The SEC has until November 14, 2023, to make a final decision on the ARK Invest and 21Shares application, but it could also extend or postpone its verdict.
Meanwhile, another prominent applicant for a spot Bitcoin ETF, Grayscale Investments, is facing a crucial deadline following a New York court ruling against the SEC’s refusal of its application to convert its popular Grayscale Bitcoin Trust (GBTC) into a spot Bitcoin ETF. The SEC is obligated to deliver a final verdict by January 10, 2024.
Some market observers believe that the SEC may either have to approve all compliant applications or approve all simultaneously to avoid giving any applicant a first-mover advantage. The market also anticipates mass approval by January next year, with early approval deemed unlikely and rejections considered improbable.
