July 3, 2023
As the world becomes more immersed in digital assets, the quest for a Bitcoin ETF continues to be a focal point in the financial world.
Despite a string of rejections over the years, Wall Street behemoth BlackRock, the world's largest asset manager, has sparked renewed hope in this quest with its recent filing for a spot Bitcoin ETF.
This article will delve into the details and process of creating and issuing an ETF, using BlackRock's recent Bitcoin ETF filing as a case study.
An ETF is a type of investment fund and exchange-traded product, traded on stock exchanges much like individual stocks. ETFs hold assets such as stocks, bonds, or commodities, and their primary aim is to track the performance of specific indices. In the case of a Bitcoin ETF, the objective would be to track the performance of Bitcoin, the largest cryptocurrency by market cap.
However, the process of creating and issuing an ETF is complex and multifaceted. To initiate, the firm interested in launching the ETF - in our case, BlackRock - needs to file an application with the Securities and Exchange Commission (SEC), detailing their proposal for the fund's operation, including its structure, investment objective, and how it intends to achieve that objective.
Here is a more detailed breakdown of the filing process for an ETF:
Before filing, the issuer must have a clear idea of the type of ETF they want to launch. This can include its investment focus (e.g., a specific sector, commodity, or, in BlackRock's case, Bitcoin) and the index it will track.
The issuer must have a team of professionals who will manage the ETF. This team will often include portfolio managers and analysts who have expertise in the ETF's investment focus.
This document is the heart of the ETF application. It describes the fund, its objectives, risks, costs, and other important details. The document must provide enough information for the SEC to make an informed decision about the ETF's viability and for potential investors to understand what they're investing in.
The prepared statement is then filed with the SEC. The filing is typically done electronically using the SEC's EDGAR system.
Once the filing is received, the SEC reviews the document. They will often send a series of comments or questions back to the issuer. These can range from requests for additional information to asking the issuer to revise certain sections of the filing.
The issuer must address all SEC comments to the satisfaction of the commission. This often involves several rounds of correspondence between the issuer and the SEC.
In addition to the registration statement, ETFs also typically need to apply for "exemptive relief" from certain SEC regulations. This process also involves filing an application and going through a series of reviews and revisions.
If the SEC is satisfied with all the responses and the registration statement, it will declare the statement "effective". This is essentially the SEC's approval of the ETF.
Once approved, the issuer will work with a stock exchange to list the ETF. This involves additional filings with the exchange.
The ETF issuer will work with a group known as authorized participants (usually large institutional organizations) to create the initial batch of ETF shares. These shares are then made available to investors on the exchange.
BlackRock's proposal for a spot Bitcoin ETF would track the current price of Bitcoin - the "spot" price. Spot prices refer to the current price of a commodity for immediate delivery. This is in contrast to most of the previously approved Bitcoin ETFs, which track cryptocurrency futures or companies with indirect exposure to crypto.
One of the significant aspects of BlackRock's filing is how it seeks to address the SEC's concerns that have led to past rejections. The SEC's primary worries revolve around market manipulation and the misappropriation of customer assets.
To this end, BlackRock proposed a "surveillance-sharing agreement," a detailed mechanism for tracking trading and clearing activity, and ensuring customer identity. This system is designed to minimize fraud and market manipulation.
Once the application is submitted to the SEC, a review process begins. During this period, the SEC scrutinizes the application, examining everything from the proposed structure to the operational controls in place to protect investors. In the case of BlackRock, it has aimed to assure the SEC that it can adequately address concerns about market manipulation and asset misappropriation.
Should the application pass muster, the SEC will approve the ETF, and the issuer can proceed with the launch. This involves creating the fund and the initial allotment of shares, which are then listed on an exchange where investors can buy and sell them.
Approval of BlackRock's ETF would mark a milestone in the cryptocurrency market. Peter Eberle, president and chief investment officer of Castle Funds, stated that SEC approval of BlackRock's ETF would breathe new life into Bitcoin and cryptocurrency markets, potentially ending the "crypto winter".
Since BlackRock's filing, other major players such as Fidelity, Invesco, and WisdomTree have refiled their own spot Bitcoin ETF applications, indicating a potential shift in industry momentum.
Other initiatives, like EDX Markets launching an execution-only trading venue for institutions and Deutsche Bank offering digital asset custody services, signal a growing institutional acceptance of digital assets.
The SEC's strictness on filings, particularly for products like ETFs, is fundamentally rooted in their mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
Here are a few reasons why the SEC is so strict:
1. Investor Protection: The SEC's primary role is to protect investors. By thoroughly reviewing filings, the SEC ensures that the proposed fund or security has provided all the necessary information an investor would need to make an informed decision. This includes details about the fund's strategy, risks, costs, management, and more.
2. Maintain Fair and Orderly Markets: The SEC's strictness also helps maintain fairness and order in the financial markets. By scrutinizing filings, the SEC can help prevent market manipulation, fraud, and other unethical practices. In the case of a Bitcoin ETF, the SEC is particularly concerned about the potential for market manipulation in the underlying Bitcoin market.
3. Facilitate Capital Formation: While the SEC's role is often associated with regulation and enforcement, it also has a mandate to facilitate capital formation. This means ensuring that securities are structured in a way that is likely to attract investment.
4. Ensuring Compliance: The process helps ensure that the companies comply with the necessary regulations. It's important for maintaining the integrity of the financial markets that everyone plays by the same rules.
5. Preventing Systemic Risk: Through its strict review, the SEC can assess whether the introduction of new products like ETFs could pose systemic risks to the broader financial system.
While the road to a Bitcoin ETF has been long and fraught with regulatory hurdles, BlackRock's recent filing brings renewed hope. As financial institutions continue to innovate and adapt to the regulatory landscape, a Bitcoin ETF may soon become a reality. This, in turn, could mark a significant step forward in mainstream acceptance and adoption of cryptocurrencies.
Could this be the fuel that the next bull run needs ?