Speculation mounts BlackRock bitcoin ETF will get green light

Speculation that BlackRock will finally break the US regulators’ decade-long resistance to exchange traded funds based on bitcoin has fuelled a rally in the token to its highest level in a year.

Optimism among crypto traders has soared in the two weeks since the world’s largest money manager filed an application to run the first publicly traded spot bitcoin ETF in the US. Bitcoin, the most popular digital token, has soared by a fifth to more than $30,000.

BlackRock’s application has pitted a group with a substantial record of ETF approvals against the Securities and Exchange Commission, which has repeatedly rejected industry efforts for an ETF based on trading in the underlying bitcoin asset.

Supporters argue a cheap and regulated asset in the world’s largest investment market would encourage more investors and hope the financial muscle of the asset manager will succeed where others have failed. The SEC has three months to assess the application.

“The BlackRock ETF is likely to be approved,” said Dave Weisberger, chief executive and co-founder of CoinRoutes, an algorithmic trading platform for the digital asset industry.

BlackRock has “pretty much undercut all the SEC’s arguments other than ‘meh, we don’t like bitcoin’, so I think they have a very reasonable chance,” he added.

Dozens of asset managers have applied to launch such a fund since the Winklevoss twins, the entrepreneurs, made the first filing in 2013, when bitcoin was trading at about $1,000.

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The SEC has yet to pass an application for an ETF based on the underlying bitcoin asset, which is traded on unregulated exchanges. The agency says it cannot offer investors guarantees the market is free from fraud and manipulation.

The only crypto-ETFs the US has approved are based on bitcoin futures contracts, which are listed and monitored on the Chicago Mercantile Exchange, a regulated market.

Both ETF and crypto markets are hoping to ride in BlackRock’s slipstream. Invesco, WisdomTree, Bitwise, Ark Investment Management and Valkyrie have all had spot bitcoin ETF filings rejected in the past but have refiled their applications, with some modifications. Ark is ahead of BlackRock in the filing queue, with the SEC due to make a ruling on its application by August 13.

The discount to the net asset value of the $18.9bn Grayscale Bitcoin Trust (GBTC), the world’s largest crypto fund, has narrowed sharply to a nine-month low of 31.3 per cent. Grayscale is suing the SEC for its refusal to allow it to convert GBTC into an ETF, a move that, if allowed, would probably see the discount disappear.

Part of the optimism stems from BlackRock’s formidable record. According to Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, the asset manager has had 575 filings approved by the SEC and only one rejection. He put the odds of approval on this occasion at 50-50. Both BlackRock and the SEC declined to comment.

Its application is also subtly different from those that have gone before. The chief difference is that the Nasdaq exchange, where the iShares Bitcoin Trust would be listed, “is expecting to enter into a surveillance-sharing agreement with an operator of a United States-based spot trading platform for bitcoin”.

In previous rejections the SEC has said a deal on surveillance “with a regulated market of significant size” was one way for an applicant to meet its obligations to prevent fraud and manipulation in the underlying market.

Coinbase is the proposed custodian for the fund and widely expected to be BlackRock’s chosen exchange.

“If Nasdaq is able to enter into an agreement with an exchange such as Coinbase, that could theoretically clear a pathway towards approval since it would directly address the SEC’s main concern”, allowing regulators “to monitor for and pursue bad actors”, said Nate Geraci, president of the ETF Store, a financial adviser.

However, Bryan Armour, director of passive strategies research, North America, at Morningstar, felt BlackRock was only “edging closer to addressing [the SEC’s] concerns”.

While a surveillance-sharing effort with a cryptocurrency exchange “is certainly better than having zero insight into the underlying market”, he argued that manipulation could still be occurring on other exchanges, which would influence the price of bitcoin.

Geraci suggested the new EDX Markets exchange, which launched this week, “could be the exact solution needed to get the SEC comfortable”.

The marketplace is backed by Fidelity Investments, Charles Schwab and Citadel Securities and only allows accredited members to trade on it, much like Nasdaq and the New York Stock Exchange. But Geraci admitted it needed to generate sufficient volume for the SEC to consider it as “significant size”.

Moreover, the SEC also sued Coinbase this month, alleging it violated US securities law by failing to register as a broker, national securities exchange or clearing agency. Coinbase has vowed to fight the suit and continue as usual.

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“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” said Paul Grewal, Coinbase’s chief legal officer.

Armour was unconvinced by the trust structure argument but retained an open mind.

BlackRock’s 575-to-1 record is “the only reason why we would expect it to be approved”, he added. “There is a reputational risk that comes with the filing. You feel that they wouldn’t do this if there wasn’t a reason.”