(Reuters) - The U.S. securities regulator on Wednesday approved the first U.S.-listed exchange-traded funds (ETFs) to track bitcoin, in a watershed for the world's largest cryptocurrency and the broader crypto industry.
The Securities and Exchange Commission said it approved 11 applications, including from BlackRock (BLK.N), Ark Investments/21Shares (ABTC.S), Fidelity, Invesco (IVZ.N) and VanEck, despite warnings from some officials and investor advocates that the products carried risks.
Most of the products are expected to begin trading Thursday, issuers said, kicking off a fierce competition for market share.
A decade in the making, the ETFs are a game-changer for Bitcoin, offering investors exposure to the world's largest cryptocurrency without directly holding it. They provide a major boost for a crypto industry beset by scandals.
"It's a huge positive for the institutionalization of Bitcoin as an asset class," said Andrew Bond, managing director and senior fintech analyst at Rosenblatt Securities.
Standard Chartered analysts this week said the ETFs could draw $50 billion to $100 billion this year alone. Other analysts have said inflows will be closer to $55 billion over five years.
The market capitalization of bitcoin stood at more than $913 billion as of Wednesday, according to CoinGecko. As of December 2022, total net assets of U.S. ETFs stood at $6.5 trillion, according to the Investment Company Institute.
Bitcoin was last up 3% at $47,300. The cryptocurrency has soared more than 70% in recent months in anticipation of an ETF and hit its highest level since March 2022 this week.
Success in the battle for inflows will mostly depend on fees and liquidity, analysts say. Some issuers slashed their proposed fees in new filings this week, including BlackRock and Ark/21Shares. Those fees range from 0.2% to 1.5%, with many firms offering to waive fees entirely for a certain period. For short-term speculators looking to buy in and out of the products, liquidity could be more important.
Companies expect a flurry of online advertising and other marketing. Some issuers, including Bitwise and VanEck, have already released ads touting Bitcoin as an investment.
"It is pretty unprecedented, so we'll see how it works. I've never been in a situation where 10 of the same ETF was launched on the same day,” said Steven McClurg, chief investment officer at Valkyrie, whose ETF was among those approved on Wednesday.
The approvals come a day after an unauthorized person published a fake post on the SEC’s account on social media platform X, saying the agency had approved the products for trading. The agency quickly disavowed and deleted the post.
On Wednesday it said it is coordinating with law enforcement and the SEC's own internal watchdog to investigate the incident.
That incident, and a confused announcement on Wednesday afternoon in which the SEC appeared to publish the formal regulatory approval and then remove it from its website, did not dampen the crypto industry celebrations.
"We believed that bitcoin could change the world, and we were and remain excited at the prospect of democratizing access to this asset," said Grayscale CEO Michael Sonnenshein.
[1/3]U.S. Securities and Exchange Commission logo and representations of cryptocurrency are seen in this illustration taken June 6, 2023. REUTERS/Dado Ruvic/Illustration/File Photo Acquire Licensing Rights
Douglas Yones, head of exchange-traded products at the New York Stock Exchange, where some products will be listed, said the approval was also a "milestone" for the ETF industry.
Cynthia Lo Bessette, head of digital asset management at Fidelity, said the new products should provide "increased choice for investors who want to engage with" crypto.
Some regulatory experts believe the bitcoin ETFs could also pave the way for other innovative crypto products. Several issuers, for example, have filed for ETFs tracking either, the second-largest cryptocurrency.
"Once the dam has been breached, it’s going to be really hard for the SEC to continue its ‘just say no to crypto’ approach,” said Jim Angel, associate professor at Georgetown's McDonough School of Business.
'SPECULATIVE, VOLATILE'
Cryptocurrencies were created as an alternative to fiat currencies -- currencies established by and backed by a government such as the U.S. dollar and the euro -- but cryptocurrencies are largely used as speculative investments due to their volatility.
The green light marks a U-turn for the SEC, which had rejected bitcoin ETFs due to worries they could be easily manipulated. SEC Chair Gary Gensler is a fierce crypto skeptic.
In a highly unusual move, however, Gensler, a Democrat, joined the SEC's two Republican commissioners in voting to approve the products, while the agency's two Democratic commissioners voted against them. One, Caroline Crenshaw, cited investor protection worries.
Hopes the SEC would finally approve bitcoin ETFs surged last year after a federal appeals court ruled that the agency was wrong to reject an application from Grayscale Investments to convert its existing Grayscale Bitcoin Trust into an ETF.
In a statement on Wednesday, Gensler said that in light of the court ruling, approving the products was "the most sustainable path forward," but added the agency did not endorse bitcoin, calling it a "speculative, volatile asset" also used to fund crime.
Gensler also repeated his long-held position that bitcoin is a commodity, not a security, and as such, Wednesday's approval was in "no way" a signal that the SEC would be easing up on its crackdown on crypto players it says are flouting its laws.
To meet the SEC's investor protection bar, several exchanges had proposed working with Coinbase, the largest U.S. crypto exchange, to police trading in the underlying bitcoin market. But the issuers scrapped that partnership this week in favor of an existing arrangement with the Chicago Mercantile Exchange, which was at the core of Grayscale's court victory.
The SEC is currently suing Coinbase for allegedly breaching U.S. securities laws, which the company denies.
Dennis Kelleher, CEO of investor advocacy think tank Better Markets, warned that bitcoin was still vulnerable to crypto fraudsters and said approving the ETFs was a "historic mistake."
"The SEC’s action today has changed nothing about this worthless financial product: bitcoin and crypto still have no legitimate use," he said.
The U.S. Securities and Exchange Commission (SEC) on Wednesday approved exchange-traded funds (ETFs) that track the price of bitcoin in a game-changer for the cryptocurrency industry which has been trying for more than a decade to launch such a product.
Multiple asset managers have applied for bitcoin ETFs since 2013, but the SEC rejected them on the grounds they would be vulnerable to market manipulation. In August, however, a court found the SEC was wrong to reject Grayscale Investments' bitcoin ETF application, forcing the agency to rethink its stance.
On Wednesday, the SEC approved applications from ARK Investments, BlackRock (BLK.N), and Fidelity, among others. Here is how the products work and why the approval is seen as a big deal:
HOW WILL THE ETFS WORK?
They will be listed on the Nasdaq, NYSE, and the CBOE. Their assets will comprise physical bitcoin purchased from crypto exchanges and held via custodians like Coinbase Global (COIN.O).
The products track a bitcoin benchmark. Some track an index provided by CF Benchmarks, a subsidiary of crypto exchange Kraken, which aggregates trading data from multiple Bitcoin-USD markets operated by big cryptocurrency exchanges.
To address the SEC's manipulation concerns, Nasdaq and CBOE have created a market surveillance mechanism with Coinbase, the largest U.S. cryptocurrency exchange.
Issuers plan to charge fees ranging from 0.20% to 0.8%, well below the broader ETF market average.
IS IT DIFFERENT FROM BUYING BITCOIN OUTRIGHT?
Yes. A spot bitcoin ETF allows investors to gain exposure to the price of bitcoin without the complications and risks of owning bitcoin directly. Those include setting up crypto wallets and accounts with crypto exchanges, some of which have poor cyber security records and are prone to hacks.
The industry has also experienced a string of bankruptcies and scandals, including the implosion of crypto exchange FTX, whose founder Sam Bankman-Fried was found guilty of fraud.
Other exchanges have been accused of flouting U.S. securities laws, while Binance, the world's largest crypto exchange, recently pleaded guilty to breaking U.S. anti-money laundering laws. All this continues to make many investors wary.
In contrast, ETFs are listed on tightly regulated stock exchanges and are therefore accessible through retail investors' existing brokerage accounts, which are also closely supervised.
The ETF structure also boosts the accessibility of Bitcoin for institutional investors, some of whom are barred from investing directly in alternative assets.
WHY IS IT DIFFERENT FROM EXISTING BITCOIN FUTURES ETFS?
The SEC in 2021 approved bitcoin futures ETF, which tracks agreements to buy or sell bitcoin at a pre-agreed price. But those products don't track price movements precisely, and the cost of rolling over futures contracts can eat into returns, making them less desirable for many investors.
AREN'T THERE SPOT BITCOIN ETFS IN CANADA AND EUROPE?
Yes. But the United States is the world's largest capital market, home to some of the globe's largest asset managers and institutional investors.
HOW MUCH WOULD A BITCOIN ETF REEL IN?
It's unclear. The ProShares Bitcoin Strategy ETF (BITO.P), the first bitcoin futures ETF approved by the SEC in 2021, saw around $1 billion worth of shares trading hands on its first day, and some experts believe a spot bitcoin ETF could net three times that much on its first day. That figure could balloon to $55 billion over five years, some experts estimate.
While bitcoin has gained 70% since the Grayscale ruling, analysts said it was unclear how much further it would rise, with some saying interest rates would play a bigger role.
BUT IT'S NOT JUST ABOUT THE MONEY
For the crypto industry, a spot bitcoin ETF is a big win, boosting the legitimacy of the cryptocurrency industry and pushing bitcoin further into the mainstream.
It also comes amid a broader tug-of-war between the crypto industry and SEC, which has been cracking down on the sector. When it comes to this particular battle, the industry can claim victory.