SEC Approves First Round of Bitcoin ETFs

Who may be interested: Investment Advisers, Registered Investment Companies

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The SEC approved the creation and listing of eleven spot Bitcoin ETFs on January 10^th. Several firms received approval to launch funds, including Ark21Shares Bitcoin ETF, Fidelity Wise Origin Bitcoin Fund, Grayscale Bitcoin Trust, and BlackRock’s iShares Bitcoin Trust.

Grayscale’s product was previously offered through a Bitcoin trust but converted to an ETF following the SEC’s action (with assets of $28.6 billion). In 2022, Grayscale had sued the SEC after the regulator had denied its applications on multiple occasions to convert its trust to an ETF, in part due to concerns over the risk of potential fraud and manipulation in the bitcoin trading markets. In August 2023, the U.S. Court of Appeals for the District of Columbia held that the SEC had arbitrarily denied the application, in light its 2021 approval of bitcoin futures funds, and ordered the SEC to reconsider. A flurry of filings revived existing ETF products. To address the SEC’s concerns, these fund sponsors entered into surveillance sharing agreements that would permit funds to monitor underlying markets for fraudulent activity.

Spot Bitcoin ETFs allow investors to own shares in funds containing Bitcoin, the world’s largest cryptocurrency, rather than directly holding the digital currency. Before the SEC’s recent action, investors were able to purchase funds that tracked Bitcoin’s price movements (primarily through bitcoin futures contracts, but also through closed end private funds holding bitcoin) but could not invest in registered funds that directly held Bitcoin. Unlike many ETFs, the spot Bitcoin ETFs are structured as trusts that hold only bitcoin and a small amount of cash. In addition, unlike more traditional ETFs, these spot Bitcoin ETFs do not use in-kind transactions in creations or redemptions of shares; all primary market transactions into and out of these funds are cash redemptions. All of the issuers intend to use in-kind transactions when approved the SEC.

The SEC’s order capped a tumultuous week. On January 9^th, the SEC’s official X account falsely posted that the regulator had approved Bitcoin ETFs. The SEC later posted a correction on X clarifying that the ETFs were not yet approved and alleging the account had been hacked.

The first Bitcoin spot ETFs began trading on January 11^th, just one day after the SEC’s orders. On their first day of trading, the combined trading volume of Bitcoin ETPs was $4.6 billion.