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Quest for a U.S. Spot Bitcoin ETF Remains Elusive - Where Do We Stand?

2022 has been a highly volatile year for Bitcoin and the broader cryptocurrency market. Behind the scenes, a battle is brewing between the industry and regulators about approving a spot Bitcoin ETF. So far, regulators at the U.S. Securities and Exchange Commission (SEC) are not convinced that applications to list a spot Bitcoin product satisfy securities laws designed to prevent manipulation and fraud.

On May 30, One River Asset Management became the latest fund issuer to be denied approval for a spot Bitcoin ETF. In recent months, applications from Ark 21Shares, Skybridge, New York Digital Investment Group, and Fidelity have faced similar rejections.

In all the aforementioned cases, the SEC concluded that the applicants did not adequately address its concerns over alleged fraud and manipulation in the Bitcoin market.

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Grayscale Takes Exception

Digital asset manager Grayscale, which has more than $27 billion in crypto assets under management, has lofty plans to convert its Grayscale Bitcoin Trust (GBTC) into a spot ETF. The SEC has until July 6 to reach a decision on the Grayscale application, which was originally filed in October 2021.

CEO Michael Sonnenshein believes the SEC has no just cause to reject his firm’s application and has not ruled out suing the regulator under the Administrative Procedure Act if approval is not granted. In the meantime, Grayscale has shored up its legal team by hiring former U.S. Solicitor General Don Verrilli. The Grayscale ruling, one way or another, could have significant implications on the near-term prospects of a spot Bitcoin ETF being approved.

Bitcoin Futures ETFs Arrive in Droves

Although the SEC has firmly rejected any attempt to list a spot Bitcoin ETF, the regulator has been much more receptive to futures-linked products. So far, the SEC has approved four Bitcoin futures ETFs, beginning in October 2021 with the actively managed ProShares Bitcoin Strategy ETF (BITO). Futures products from Valkyrie, VanEck, and Teucrium soon followed.

Unlike spot ETF applications, which aim to create shares based on the price of physical Bitcoin, futures products are based on the price of a contract unit of the digital asset. Futures ETFs provide the SEC with an easier path to approval given that the underlying contracts, which are based on CME Group’s Bitcoin futures, are already regulated by the Commodity Futures Trading Commission (CFTC).

Still, the decision to grant futures products and not a spot ETF has drawn criticism from the Bitcoin community. Many digital currency proponents believe that buying and holding Bitcoin directly is far less risky than investing in the futures market where the phenomenon of contango is present.

Lessons From Up North

Amid all the drama surrounding spot Bitcoin ETF approvals in the U.S., our neighbor to the north, Canada, has already greenlit two such products for trading. In early 2021, ProShares and Evolve Funds received approval from the Ontario Securities Commission to list physically-settled Bitcoin ETFs.

The Purpose Bitcoin ETF has proven especially popular, even during the so-called crypto winter that has seen asset prices plunge by over 50%. After a week of heavy inflows in mid-May, Purpose ETF’s assets under management swelled to 43,700 BTC, a new all-time high.

Securities regulators in the U.S. are likely keeping a close eye on Canada’s spot Bitcoin ETFs to gauge how the funds perform relative to BTC and, more importantly, how the market is responding to wild fluctuations in the asset’s price. So far, evidence from the Purpose Bitcoin ETF suggests that the fund isn’t persistently trading with huge premiums or discounts. In other words, the ETF is moving in lockstep with the BTC price – and that’s a good thing.

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