SEC Approves Bitcoin Exchange-Traded Products (ETPs)

SEC Approves Bitcoin Exchange-Traded Products (ETPs)

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January 19, 2024
SEC Approves Bitcoin Exchange-Traded Products (ETPs)
On January 10, 2024, the Securities and Exchange
derivatives contracts. Because they do not invest primarily
Commission (SEC) approved 11 spot Bitcoin exchange-
in securities, ETPs in this category do not register under the
traded product (ETP) Rule 19b-4 applications. U.S. Bitcoin
Investment Company Act. Instead, they register their
ETP proposals first appeared more than a decade ago, but
securities under the Securities Act of 1933. These ETPs are
these were the first spot Bitcoin ETPs (as opposed to
not registered investment companies. Thus, the SEC’s
Bitcoin futures ETPs, explained in more detail below) to be
generic listing standards are not available to them, and they
approved. Table 1 lists the relevant ETPs, their listing
are subject to individual approval from the SEC.
exchanges, and fees. This In Focus examines ETPs and
their regulation and recent Bitcoin ETP developments and
Rule 19b-4 Evaluations
implications.
National securities exchanges must obtain SEC approval of
a proposed rule change under Rule 19b-4 before listing and
Table 1. SEC-Approved Spot Bitcoin ETPs (1/10/2024)
trading the ETPs mentioned above. The Securities
Exchange Act of 1934 requires the SEC to ensure that the
Issuer
Ticker
Exchange
Fees rules of national securities exchanges meet certain
Grayscale Bitcoin Trust
GBTC
NYSE
1.50%
standards. Section 6(b)(5) of the act prescribes that an
exchange’s rules must be “designed to prevent fraudulent
ARK 21Shares Bitcoin ETF
ARKB
CBOE
0.21%
and manipulative acts and practices.” The SEC has not
BlackRock’s iShares Bitcoin Trust
IBIT
Nasdaq
0.25%
adopted a rule interpreting this language and instead
evaluates exchange rule changes—including rule changes
Bitwise Bitcoin ETF
BITB
NYSE
0.20%
involving new ETPs—on a case-by-case basis.
VanEck Bitcoin Trust
HODL
CBOE
0.25%
Disclosure Requirements
Wisdomtree Bitcoin Fund
BTCW
CBOE
0.30%
Bitcoin ETP issuers must file Form S-1, the initial
registration statement under the Securities Act for any new
Invesco Galaxy Bitcoin ETF
BTCO
CBOE
0.39%
securities to be listed on national securities exchanges.
Fidelity Wise Origin Bitcoin Trust
FBTC
CBOE
0.25%
Form S-1 includes information on the issuer’s risk factors, a
description of the securities and the issuer’s management,
Valkyrie Bitcoin Fund
BRRR
Nasdaq
0.49%
use of proceeds, determination of offer price, and audited
Hashdex Bitcoin ETF
DEFI
NYSE
0.90%
financial statements, among other disclosures. Part I of
Form S-1 serves as the prospectus, the explanation
Franklin Bitcoin ETF
EZBC
CBOE
0.29%
document that investors involved in securities offering and
Source: CRS using information from the SEC.
sales must receive. After the effective initial filing, issuers
Notes: Some funds offer fee waivers for initial investment periods.
must also comply with ongoing reporting requirements.
Although some funds self-label as ETFs, they are technical y ETPs per
National Securities Exchanges Listing Standards
SEC standards. For more fund-level details, click here for an Excel file
from the Financial Times. CBOE = Chicago Board Options Exchange
Bitcoin ETPs that list on national securities exchanges must
BZX Exchange. NYSE = New York Stock Exchange Arca Exchange.
comply with the respective exchange’s listing rules
Nasdaq = Nasdaq Stock Market, LLC.
governing practices such as financial and distribution
standards and corporate governance requirements.
Regulatory Frameworks
Regulation of Investment Advisory Intermediaries
ETPs are pooled investment vehicles that gather and invest
Intermediaries involved in Bitcoin ETP asset management
money from a variety of investors. Unlike mutual fund
shares, which trade once per day at market close, ETPs
and investment advisory services, such as broker-dealers
and SEC-registered investment advisors, could be subject to
trade throughout the day on national securities exchanges.
SEC fiduciary and Regulation Best Interest standards.
ETPs include a diverse range of products that invest in a
variety of financial assets. Exchange-traded funds (ETFs)
These standards govern the intermediaries’ professional
conduct and disclosures, including mitigating conflict-of-
are the largest and most well-known category of ETPs.
interest concerns and appropriately prioritizing clients’
ETFs must invest primarily in securities and register as
interests relative to their own.
investment companies under the Investment Company Act
of 1940. The SEC has adopted “generic listing standards”
Spot Bitcoin ETP v. Bitcoin Futures ETP
that allow national securities exchanges to list and trade
ETFs without obtaining individualized approval from the
An ETP can offer Bitcoin exposure by purchasing either
Bitcoin itself (“spot” Bitcoin) or Bitcoin futures contracts.
SEC. ETPs that are not ETFs include trust or partnership
In 2021, the SEC did not object to the registration and
vehicles that invest primarily in physical commodities or
https://crsreports.congress.gov

SEC Approves Bitcoin Exchange-Traded Products (ETPs)
listing of three ETFs providing exposure to Bitcoin futures.
erased the gap between GBTC share price and the value of
These ETFs were structured in a way that allowed them to
its Bitcoin holdings right after the SEC approval.
be registered as investment companies under the Investment
Company Act: The funds hold 75% of their assets in fixed-
Policy Debates
income securities and 25% of their assets in the form of
Bitcoin ETP proponents argue that the funds provide a
shares of a wholly owned subsidiary, which in turn invests
familiar and convenient way for investors to invest in
in Bitcoin futures traded on the Chicago Mercantile
digital assets, enabling them to partake in potential financial
Exchange. While the ETFs are thus likely to derive the bulk
gains. Additionally, one SEC commissioner has argued that
of their total return from Bitcoin futures, their investment in
the merits of Bitcoin as an investment are not appropriate
securities makes them eligible for Investment Company Act
considerations for the SEC, which is tasked with ensuring
registration. Because the ETFs were eligible for the SEC’s
adequate disclosure and protecting investors from fraud—
generic listing standards given their status as registered
not evaluating the value of particular products. In a separate
investment companies, national securities exchanges were
statement, two SEC commissioners stated that spot Bitcoin
not required to submit rule change applications to the SEC
ETPs could be a pathway to allow the Bitcoin market to
before allowing the ETFs to trade.
mature and provide investors with a safer means of
accessing Bitcoin. Some Members of Congress sent a letter
In April 2022, the SEC approved the New York Stock
to the SEC in September 2023 and supported the spot
Exchange’s (NYSE’s) application to list the Teucrium
Bitcoin ETPs as a safer and more transparent pathway for
Bitcoin Futures Fund—an ETP registered under the
investors to access Bitcoin.
Securities Act but not the Investment Company Act. In
doing so, the SEC concluded that the ETP complied with
Opponents of spot Bitcoin ETPs point to risks associated
Section 6(b)(5)’s requirement regarding fraud and
with the funds. Concerns about fraud and manipulation
manipulation by virtue of the NYSE’s surveillance-sharing
remain at the center of the debates. Skeptics have argued
agreement with the Chicago Mercantile Exchange . (This
that spot Bitcoin markets are rife with abuses and that SEC
argument later created ramifications for the D.C. Circuit’s
approval of a spot Bitcoin product would give
Grayscale decision that paved the way for the SEC’s
cryptocurrencies an undeserved veneer of legitimacy. These
approval of spot Bitcoin ETPs.)
concerns are related to separate arguments about the merits
of Bitcoin as an investment. Some have questioned the
While Bitcoin futures ETPs offer investors exposure to
economic or social value of cryptocurrencies, contending
Bitcoin, commentators have identified several potential
that Bitcoin has proven useful only as a vehicle for
disadvantages that such products face relative to a spot
speculation and facilitator of illicit activity. In addition,
Bitcoin ETP. Perhaps most significantly, because futures
Bitcoin ETP challenges as articulated in a 2018 SEC staff
contracts expire upon a certain date, futures ETPs must
letter include valuation and pricing, custody, and liquidity.
regularly “roll” contracts from one period to another,
incurring costs that can diminish returns.
The S-1 filings for spot Bitcoin ETPs summarize a variety
of risk factors, including risks associated with Bitcoin and
The ETP structure may offer investors certain advantages
the Bitcoin network as innovative technology with limited
over holding Bitcoin directly due to operational
operating history; the fact that Bitcoin spot markets are
considerations. For example, a Bitcoin ETP would allow
relatively new and largely unregulated; risks related to
investors to gain exposure to Bitcoin via a traditional
fraud, manipulation, and security breaches; cybersecurity
brokerage account, which would avoid the challenges that
risks; illicit activity concerns; valuation and trading risks;
accompany self-custody of Bitcoin. While spot Bitcoin
and regulatory uncertainty.
ETPs are new to the United States, multiple Ethereum and
Bitcoin ETFs have received regulatory approval and
Market Implications
popular market reception in Canada since 2021. Global spot
Bitcoin prices have increased in the months leading up to
Bitcoin ETFs trading in Canada, Europe, Brazil, and
the SEC’s spot Bitcoin ETP approval. The price increases
Australia, among others, reportedly totaled more than $4
may reflect anticipation that spot ETPs could generate
billion as of November 2023.
greater demand in Bitcoin from retail as well as institutional
investors, such as pension funds and registered investment
The spot Bitcoin ETP structure also offers advantages to the
adviser-based funds. Whether these higher price levels are
largest publicly traded Bitcoin fund—the Grayscale Bitcoin
sustainable remains to be seen. In the meantime, major
Trust (GBTC). As of December 2023, GBTC owned more
traditional and new ETF vendors—such as BlackRock,
than 3% of Bitcoin in circulation, representing more than
Fidelity, and 21Shares—have staged a fee competition in
$26 billion. GBTC shares traded at a discount from the net
connection with spot Bitcoin ETPs to attract capital inflow
asset value of GBTC’s Bitcoin holdings. This discount was
to their funds.
the result of GBTC’s previous structure that did not allow
investors to redeem shares for the trust’s underlying assets,
U.S. Bitcoin ETPs saw $4.6 billion in trading on their first
precluding the type of arbitrage that would cause the price
day. BlackRock’s IBIT became one of the best performing
of GBTC shares to converge with the price of those assets.
brand-new ETPs. This initial success of spot Bitcoin ETPs
The ETP structure—which relies on continuous creation
have prompted debates about the potential approval of more
and redemption of shares by authorized participants to keep
ETPs backed by other forms of digital assets, such as Ether.
an ETP’s market price in line with its net asset value—
Skeptics remain wary over the longer-term benefits of the
funds.
https://crsreports.congress.gov

SEC Approves Bitcoin Exchange-Traded Products (ETPs)

IF12573
Eva Su, Specialist in Financial Economics

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https://crsreports.congress.gov | IF12573 · VERSION 1 · NEW