Will 2023 Be the Year of the Bitcoin ETF?

Excitement over the hoped-for approval of a spot bitcoin exchange-traded fund is back again. This time, financial giant BlackRock’s entrance to the race for an ETF has spurred hope that the Securities and Exchange Commission will approve the long-awaited product, a decade after the crypto industry first sought to launch a bitcoin ETF.

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In July 2013, Cameron and Tyler Winklevoss filed to launch the first bitcoin exchange-traded fund (ETF). Eleven years later, the industry is still waiting for a spot bitcoin product.

A bitcoin ETF would, if approved, allow a broad swath of retail investors in the U.S. gain exposure to bitcoin as an asset without having to go through the trouble of setting up a wallet or dealing with sometimes finicky crypto exchanges. Furthermore, sophisticated investors like multimillion-dollar family offices would be able to invest in a regulated (and therefore “safe”) bitcoin product. Those are some of the reasons advocates want to see an ETF okayed by the Securities and Exchange Commission.

Well over two years ago, the Ontario Securities Commission approved the first North American bitcoin exchange-traded fund, as well. Later in 2021, the U.S. Securities and Exchange Commission , opening the door to several other similar products.

As of right now, there's still no spot bitcoin ETF trading in the U.S., but BlackRock’s filing a few weeks ago signaled to the industry that the time may be coming when that changes. Over the past few weeks, we’ve seen half a dozen new applications for a spot bitcoin ETF in the U.S. Has the market evolved enough to support an ETF, and can companies provide the SEC with enough assurances that an ETF would be safe?

The major difference we’re seeing now is these applicants are spending more time (with from the SEC). Coinbase will be the marketplace for all of the major would-be ETF issuers that have identified a partner so far – namely, Nasdaq and Cboe BZX, on behalf of BlackRock, Fidelity, VanEck and others.

The SEC has brought up surveillance-sharing agreements in the past. In 2019, the regulator explaining its rejection of a bitcoin ETF application from Bitwise, saying the bitcoin market had too much potential for manipulation and there needed to be a “surveillance-sharing agreement with a regulated market of significant size relating to the underlying assets” to deter any potential manipulation.

One problem is there's no clear definition for what a regulated market of significant size is, said James Seyffart, an analyst with Bloomberg Intelligence who’s followed bitcoin ETF applications for years.

“Usually, every time they delay all the way through and then they deny them. In that process, they sometimes give comments,” Seyffart said. “Some of it is going to be behind closed doors ... some of that is undoubtedly going to happen.”

Coinbase is undoubtedly the largest U.S. crypto exchange. According to , it has more than twice the 24-hour trading volume (when normalized) overall when compared to its closest competitor, Kraken. The appears to come from its bitcoin market.

The SEC has even acknowledged Coinbase’s role in the U.S., “one of the largest crypto asset trading platforms in the world and the largest in the United States” in its .

The SEC’s lawsuit against Coinbase has nothing to do with its bitcoin market, which I’m guessing is also one of the reasons these companies are looking to the exchange as their surveillance-sharing agreement partner.

The open question is whether the SEC will agree that Coinbase operates a regulated bitcoin market of significant size – and whether that’s necessary for an approval.

Last year, the that there was any regulated market for bitcoin. Specifically, when it approved in April 2022, the SEC wrote that “spot bitcoin markets are not currently ‘regulated,’” in a footnote explaining why surveillance-sharing agreements for bitcoin futures market wouldn’t work for spot ETFs.

Meanwhile, argues that there doesn’t need to be a significant, regulated market in the first place, pointing to past ETF rejections.

“The regulated market of significant size test does not require that the spot bitcoin market be regulated in order for the Commission to approve this proposal, and precedent makes clear that an underlying market for a spot commodity or currency being a regulated market would actually be an exception to the norm,” the filing said. “These largely unregulated currency and commodity markets do not provide the same protections as the markets that are subject to the Commission’s oversight, but the Commission has consistently looked to surveillance sharing agreements with the underlying futures market in order to determine whether such products were consistent with the Act.”

The bitcoin futures market should be enough for the SEC’s “significant size” test, the filing said.

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