U.S. regulators for the first time approved exchange-traded funds that invest directly in Bitcoin, a move heralded as a landmark event for the roughly US$1.7 trillion digital-asset sector that will broaden access to the largest cryptocurrency on Wall Street and beyond.
The Securities and Exchange Commission, whose three-part mandate includes investor protection, authorized funds from industry heavyweights BlackRock, Invesco and Fidelity to smaller competitors including Valkyrie to begin trading Thursday.
The approvals also mark a rare capitulation by the SEC following opposition that lasted for more than a decade, ever since Tyler and Cameron Winklevoss first proposed a Bitcoin ETF in 2013. BlackRock Inc.’s surprise application last June, followed by an appeals court ruling that called the denial of a different application “arbitrary and capricious,” triggered a blistering rally in the cryptocurrency as speculation that U.S. regulators would finally give their blessing to the structure.
“While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin,” SEC Chair Gary Gensler said in a statement. “Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.”
At the crux of the SEC’s previous rulings against a spot ETF was the argument that no regulated exchange was able to adequately monitor Bitcoin trading in a way that would reliably detect fraud and manipulation. That contention was opposed by Ark, among others, which provided data showing a high correlation between cash trading and the futures contracts that trade on CME Group’s platform.
In reviewing the latest set of proposals, the SEC said it examined the correlation between spot and futures trading at a variety of time intervals and concluded prices moved in such a way that irregularities on exchanges such as Kraken and Coinbase were likely to show up in the futures.
“Because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the exchanges’ comprehensive surveillance-sharing agreement with the CME — a U.S. regulated market whose bitcoin futures market is consistently highly correlated to spot bitcoin, albeit not of “significant size” related to spot bitcoin — can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the proposals,” the order said.
The decision comes a day after a false post on the SEC’s X account claimed that the agency had approved the ETFs. The regulator subsequently said that the account had been compromised, causing the price of Bitcoin to fluctuate widely.
Bitcoin was little changed at about $46,300 following the approvals. The original cryptocurrency, which sank 64% in 2022, more than doubled in 2023 in large part because of speculation that the SEC would eventually approve ETFs that will allow investors to get exposure to the token in their traditional brokerage accounts instead of one of the crypto-native startups that have come under increasing government scrutiny following a series of sector scandals and bankruptcies.
“The approval means that both retail and institutional investors now have the ability to diversify their portfolio with crypto exposure without worrying about the complicated issues of custody,” said Campbell Harvey, finance professor at Duke University. “The ETF makes it easy to add to your portfolio.”
Crypto proponents have for years argued that a so-called spot fund that invests directly in Bitcoin would be beneficial to investors and would help bring the industry closer to the more highly regulated world of traditional finance. It also suggests a sort of milestone of maturity for the relatively nascent industry, where skirmishes with regulators came to a climax after the collapse of Sam Bankman-Fried’s FTX empire highlighted risks lurking in the industry.
The landmark decision comes after Grayscale Investments won a key victory over the SEC. A federal appeals court had overturned the rejection of Grayscale’s application to convert its Bitcoin trust into an ETF. The court called the denial “arbitrary and capricious” because the commission failed to explain its different treatment of similar products. ETFs that hold Bitcoin futures were approved in 2021.
The SEC’s loss to Grayscale was one of the reasons why the SEC approved the applications, Gensler said in Tuesday’s statement.
“Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot Bitcoin ETP shares,” Gensler said.