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    Bankless

    Expert's Take: Is a Bitcoin ETF Really Possible? with James Seyffart

    Tue Jul 11 2023
    Bitcoin ETFCrypto MarketGlobal ETF MarketUnderlying AssetsSEC Approval ProcessBlackRockPolitical PressureETF ApplicationsImpact on Crypto MarketChallenges and Benefits of Bitcoin ETF

    Description

    The episode discusses the possibility of Bitcoin ETF approval, the benefits of ETFs in financial markets, the global ETF market, the wide range of assets covered by ETFs, the SEC's role in approving ETFs, challenges and controversies in the ETF approval process, different processes for spot and futures ETFs, factors influencing ETF approval, BlackRock's entry into the crypto ETF space, political pressure and lawsuits for ETF approval, the status of ETF applications and deadlines, and the challenges and potential benefits of a Bitcoin ETF.

    Insights

    Circumstantial evidence suggests that the Bitcoin ETF will be approved.

    BlackRock and Fidelity have submitted filings for ETFs with the SEC. The question is whether Gary Gensler will let them through.

    Crypto ownership leads to more economic security and regulatory interest in crypto.

    Understanding traditional finance is important for understanding how crypto can disrupt it.

    Permissionless is a crypto conference happening in September 2023 in Austin, Texas.

    Kraken Pro is recommended as a top crypto exchange for trading needs.

    ETFs are considered a wrapper and a democratizing technology for underlying assets.

    ETFs provide an opportunity for both institutional investors and retail investors to participate in the same pool of investments.

    If approved by the SEC, ETFs can clean up the crypto market, drive down trading costs, and make markets more efficient and liquid.

    ETFs have proven to be efficient and held up well during periods of market volatility, such as March 2020.

    The global ETF market is around $10 trillion, with the US alone accounting for $7.25 trillion.

    US advisors control about $30 trillion in assets, with a significant portion invested in ETFs.

    ETFs cover a wide range of assets, including stocks, bonds, treasuries, commodities, and even cryptocurrencies.

    There are specialized ETFs that focus on specific sectors like real estate or data warehouses.

    Tokenization of assets is similar to the concept of ETFs.

    Market makers and APs ensure efficient trading and creation/redemption of shares in ETFs.

    Gold ETFs can be redeemed for physical gold through intermediaries called authorized participants (APs).

    Auditing is conducted to ensure the integrity of the gold holdings.

    The responsibility for approving ETFs lies with the SEC, specifically the Division of Markets and Trading led by Gary Gensler as the chairman.

    There are four commissioners at the SEC who make decisions on ETF approvals. The chairman's vote carries significant weight as they have overriding power when there is a tie between Republicans and Democrats on decisions. If one or more commissioners dissent against a denial decision, it increases the likelihood of approval.

    Chapters

    1. Bitcoin ETF Approval
    2. Crypto ETFs and Economic Security
    3. Permissionless Conference and Crypto Exchanges
    4. ETFs as Democratizing Technology
    5. Benefits of ETFs in Financial Markets
    6. The Global ETF Market
    7. Wide Range of Assets Covered by ETFs
    8. Underlying Assets and Trading Efficiency in ETFs
    9. Gold ETFs and Physical Delivery
    10. SEC's Role in Approving ETFs
    11. Challenges and Controversies in ETF Approval Process
    12. Different Processes for Spot and Futures ETFs
    13. Factors Influencing ETF Approval
    14. BlackRock's Entry into Crypto ETF Space
    15. BlackRock's Filing and Partnerships
    16. Political Pressure and Lawsuits for ETF Approval
    17. Status of ETF Applications and Deadlines
    18. Impact of ETF Approval on Crypto Market
    19. Challenges and Potential Benefits of Bitcoin ETF
    Summary
    Transcript

    Bitcoin ETF Approval

    00:00 - 06:52

    • Circumstantial evidence suggests that the Bitcoin ETF will be approved.
    • BlackRock and Fidelity have submitted filings for ETFs with the SEC.
    • The question is whether Gary Gensler will let them through.

    Crypto ETFs and Economic Security

    00:00 - 06:52

    • Crypto ETFs are a gateway to owning crypto assets.
    • More crypto ownership leads to more economic security and regulatory interest in crypto.
    • Understanding traditional finance is important for understanding how crypto can disrupt it.

    Permissionless Conference and Crypto Exchanges

    00:00 - 06:52

    • Permissionless is a crypto conference happening in September 2023 in Austin, Texas.
    • Kraken Pro is recommended as a top crypto exchange for trading needs.

    ETFs as Democratizing Technology

    12:43 - 18:47

    • ETFs are considered a wrapper and a democratizing technology for underlying assets.
    • ETFs provide an opportunity for both institutional investors and retail investors to participate in the same pool of investments.

    Benefits of ETFs in Financial Markets

    12:43 - 18:47

    • ETFs can be more liquid than the underlying assets during good times, but may face issues during times of stress or market freezes.
    • ETFs have proven to be efficient and held up well during periods of market volatility, such as March 2020.
    • If approved by the SEC, ETFs can clean up the crypto market, drive down trading costs, and make markets more efficient and liquid.

    The Global ETF Market

    18:29 - 24:39

    • The global ETF market is around $10 trillion, with the US alone accounting for $7.25 trillion.
    • US advisors control about $30 trillion in assets, with a significant portion invested in ETFs.
    • Retail investors make up a decent chunk of the ETF market, likely over 30%.

    Wide Range of Assets Covered by ETFs

    18:29 - 24:39

    • ETFs cover a wide range of assets, including stocks, bonds, treasuries, commodities, and even cryptocurrencies.
    • There are specialized ETFs that focus on specific sectors like real estate or data warehouses.

    Underlying Assets and Trading Efficiency in ETFs

    24:22 - 30:33

    • Tokenization of assets is similar to the concept of ETFs.
    • ETFs allow access to underlying assets, which differs between stocks and commodities like gold or oil.
    • Market makers and APs ensure efficient trading and creation/redemption of shares in ETFs.

    Gold ETFs and Physical Delivery

    30:12 - 36:19

    • Gold ETFs can be redeemed for physical gold through intermediaries called authorized participants (APs).
    • Every share of an ETF should be backed by physical gold stored in a vault.
    • Auditing is conducted to ensure the integrity of the gold holdings.

    SEC's Role in Approving ETFs

    36:08 - 42:32

    • The responsibility for approving ETFs lies with the SEC, specifically the Division of Markets and Trading led by Gary Gensler as the chairman.
    • There are four commissioners at the SEC who make decisions on ETF approvals. The chairman's vote carries significant weight as they have overriding power when there is a tie between Republicans and Democrats on decisions. If one or more commissioners dissent against a denial decision, it increases the likelihood of approval.

    Challenges and Controversies in ETF Approval Process

    36:08 - 42:32

    • There are ties to the Democratic Party in the ETF approval process.
    • The issuers of ETFs filing for SEC permission are a small collection of very large companies.
    • The SEC's job is to prevent fraud and manipulation, not make merit-based decisions on investments.

    Different Processes for Spot and Futures ETFs

    42:13 - 48:34

    • The process for listing spot Bitcoin ETFs goes through a proposal for a rule change.
    • Gary Gensler's speech in late-2021 led to the approval of Bitcoin Futures ETFs filed under the 1940 Act.
    • Ethereum Futures ETFs have not been approved yet, as Gensler has not declared Ethereum as non-security.

    Factors Influencing ETF Approval

    48:14 - 55:12

    • Gensler is in favor of futures Bitcoin ETFs because they are covered by the CFTC and have regulated markets.
    • The SEC approved futures ETFs under a different process than spot ETFs, causing confusion and inconsistency.
    • Surveillance of an underlying market and a regulated spot market of significant size are requirements for ETF approval.

    BlackRock's Entry into Crypto ETF Space

    54:46 - 1:01:14

    • BlackRock's entry into the crypto ETF space is significant as they are a $9 trillion asset manager with a strong track record of successful applications.
    • BlackRock's filing caught many by surprise, as it was expected that they would wait for another company to get approval before entering the market.
    • Larry Fink, BlackRock's CEO, has shown more support for Bitcoin recently, which may indicate a change in perspective or strategic motives.

    BlackRock's Filing and Partnerships

    1:01:08 - 1:07:11

    • BlackRock filed a 19b4 filing, signaling their entry into the Bitcoin market.
    • They entered into a surveillance sharing agreement with Coinbase, the largest US exchange.
    • Other exchanges like NASDAQ, NYSE, and CBOE have also partnered with issuers to file similar applications.

    Political Pressure and Lawsuits for ETF Approval

    1:06:51 - 1:13:23

    • BlackRock may be willing to take the risk of launching a crypto ETF due to the potential financial benefits.
    • There is political pressure building on the SEC to approve a crypto ETF.
    • Grayscale's lawsuit against the SEC could result in a decision that forces the SEC to approve their application or deny it with additional reasons.

    Status of ETF Applications and Deadlines

    1:12:59 - 1:19:25

    • 21 shares and Van Eck were denied by the SEC for their crypto ETF applications.
    • ARK and 21 shares quickly reapplied after being denied.
    • The only active application in the process is ARK21 shares in partnership with CBOE.

    Impact of ETF Approval on Crypto Market

    1:18:55 - 1:25:27

    • The lack of an approved Bitcoin ETF has led investors to trust alternative platforms like FTX and Celsius.
    • The SEC's decision to not approve ETFs may have been beneficial for the long-term health of the crypto market.
    • Bitcoin spot ETFs already exist outside of the US in countries like Canada and Europe.

    Challenges and Potential Benefits of Bitcoin ETF

    1:31:17 - 1:34:30

    • Advisors prefer to bring crypto assets under the umbrella where they can charge a 1% fee.
    • Most advisors are not putting significant client assets in cold storage or wallets.
    • An ETF is a tried and true technology wrapper for easy exposure to crypto assets.
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