The Securities and Exchange Commission (SEC) announced today that it has denied all applications for spot Bitcoin exchange-traded funds (ETFs), dealing a major blow to the cryptocurrency industry which had high hopes for approval this month.
SEC Cites Manipulation, Volatility Concerns for Denials
In rejecting the applications from asset managers like Fidelity and Grayscale, the SEC cited ongoing concerns around potential market manipulation and extreme volatility in Bitcoin prices as the main reasons.
“We do not believe the Bitcoin spot market currently has the safeguards needed to support a spot ETF approval at this time. Concerns around fake trading volumes, wash trading, and lack of surveillance sharing agreements give us pause on the maturity and integrity of Bitcoin spot trading,” said SEC Chairman Gary Gensler in a press statement.
The price of Bitcoin plunged over 12% within minutes of the announcement, falling below $36,000. The overall crypto market cap dropped by over $120 billion as prices across altcoins also saw double-digit percentage declines.
Some experts were surprised at the across-the-board denials, as many expected the SEC to approve at least one spot ETF application.
“This blanket denial of all spot ETFs seems an exaggerated response by the SEC. With major players like Fidelity having submitted extremely solid applications, many hoped to see at least one approval,” said Marissa Jones, a crypto ETF analyst at Investments Daily.
Crypto Industry Frustration, Confusion on Display
Frustrations from the crypto industry were immediate, with leaders noting the contradictory nature of the SEC rejections when compared to futures-based Bitcoin ETFs which have already been approved.
“It is ridiculous that the SEC continues moving the goalposts on spot Bitcoin ETFs while having already approved BTC futures ETFs which provide less direct exposure. This decision seems to be motivated more by outdated biases than logic or consistency,” tweeted Changpeng Zhao, CEO of Binance.
Others like Anthony Scaramucci pointed to the fact that several countries have functioning spot Bitcoin ETFs already:
“With Canada, Australia, Dubai, Germany and several other nations having successful spot #Bitcoin ETFs trading already, the SEC’s stance here seems oddly stubborn rather than prudent.”
Galaxy Digital CEO Mike Novogratz tried to reassure markets, tweeting:
“Let the air out slowly. Spot ETFs will still get approved. Just taking a bit longer than we thought. Stay bullish my friends. Big things are still coming.”
What’s Next After ETF Denials?
While the market disappointment is acute currently, analysts seem to agree this is more of a roadbump rather than the end of the road. Here is what might be next for Bitcoin ETF hopes:
More Futures ETF Products Coming
While not as ideal as spot ETFs, more futures-based Bitcoin ETF products are likely to continue launching in 2023. These provide more indirect Bitcoin exposure by tracking crypto futures contracts traded on exchanges like CME rather than Bitcoin directly.
Assets under management across existing futures ETFs will likely continue growing as more institutional investors utilize these regulated vehicles. Lower fees and new futures ETF issuers could also enter the market.
“It’s clear the SEC is currently more comfortable with a futures framework. So while expectations on spot ETF approvals may cool down, futures products seem poised to proliferate further,” said Simran Kalra, a senior analyst with the Block Research firm.
Spot Bitcoin ETF Re-applications Later This Year
Rather than outright appeals, Bitcoin spot ETF issuers seem poised to take the SEC’s feedback into account and re-apply later this year with improved proposals.
“By citing ongoing concerns around potential manipulation, the SEC is essentially providing a roadmap for re-application. If these perceived structural issues in Bitcoin spot trading can be addressed via surveillance sharing agreements and transparency measures, that could pave the way for approvals,” said Kalra.
Firms like Fidelity, Grayscale, and Galaxy Digital have the resources and determination to reinforce their applications and re-apply if needed.
Growing Institutional Adoption Regardless of ETFs
Importantly, institutions have been adopting Bitcoin and crypto assets at a rapid clip over the past two years, largely independent of an ETF approval.
MicroStrategy CEO Michael Saylor noted:
“Institutions understand Bitcoin is the apex property, regardless of an ETF. They will continue allocating to BTC and the best crypto networks. This spot ETF denial does not change Bitcoin’s long-term investment thesis.”
Major asset managers like BlackRock, banks like Goldman Sachs, payment giants like Visa and Mastercard, tech leaders like Meta – they have all taken significant strides towards supporting crypto assets with or without an ETF approval.
This growing institutional endorsement is likely to provide a floor for crypto markets, preventing an extended bear market despite the latest ETF setback.
As Anthony Scaramucci summed up:
“Markets may correct on this disappointing SEC news, but Bitcoin and crypto adoption have a momentum of their own now. The long-term trajectory is undeniable regardless of regulatory headwinds along the way.”
The crypto community is rallying in support of Bitcoin developers and organizations that are improving the network’s fundamentals and regulatory standing – which may ultimately sway the SEC towards approving Bitcoin ETFs in the coming year.
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