SEC’s Stance on Bitcoin ETF and Market Implications

10.19.2023

Wave Leadership Thoughts, by Nauman Sheikh, Head of Protocol Treasury Management 

Late on Friday, the SEC decided against appealing a court ruling in favor of Grayscale Investments concerning the SEC’s review of the conversion of the Bitcoin Trust into a spot Bitcoin exchange-traded fund (ETF). This decision came after a 45-day appeal period. Following this, the SEC will likely be instructed to revisit Grayscale’s ETF application.

In our experience, market participants estimate a 90% chance of this happening in Q1 2024. However, it’s crucial to note that the SEC might still unearth other grounds for refusal. Monday morning’s inaccurate reports by Cointelegraph regarding a Blackrock BTC spot ETF approval may not sit well with the SEC, illustrating yet another example of market susceptibility to misinformation. Bitcoin saw a brief 10% rally on the tweet, ignited by a $75 million short liquidation cascade, but retreated quickly as the false news was corrected. Nevertheless, spot prices remain at levels higher than before the tweet, with implied volatilities experiencing a 6-7% surge post-tweet, a change that has yet to be undone.

The optimism in the market is also reflected in the shrinking Grayscale discounts. GBTC now trades at a lesser -15% discount compared to a stark -50% discount at the beginning of 2023. The lucrative phase of this long GBTC/Short Bitcoin arbitrage seems to have passed, and some traders are likely to start booking profits, which could maintain a bid on BTC spot. 

The discussion is also veering towards whether, upon the announcement of an ETF issuer, the SEC would show favoritism, for instance, preferring Blackrock over others. We believe such an occurrence appears unlikely. ETF issuers inherently have a first-mover advantage, and any biased approval would set a hazardous precedent, potentially subjecting the SEC to scrutiny. We believe the more likely scenario is the SEC approving all the spot ETF registrations on the same day, fostering a competitive environment similar to the ETH futures ETFs scenario where all 9 were approved simultaneously.

The ETF Approval Pipeline is brimming with notable applications from 21Shares & ARK, BlackRock, Bitwise, VanEck, Wisdomtree, Invesco & Galaxy, Fidelity, and Valkyrie, all awaiting their fate in this evolving landscape.

Latest News:

WELCOME FRIENDS: Hundreds of institutions and prominent individuals have invested directly in crypto, adopted the value thesis, or started building technology to support digital assets since Wave started tracking these developments in late 2020. Now the rise of the Metaverse, Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), and Decentralized Autonomous Organizations (DAOs) is driving mainstream adoption of blockchain technologies everywhere we look. We’re continuing to keep track of it every week here:

• UBS Asset Management has launched its first live pilot of a tokenized Variable Capital Company (VCC) fund in Singapore, marking a key milestone in bringing real-world assets on-chain. The fund is part of Project Guardian, a collaborative industry initiative led by the Monetary Authority of Singapore to explore tokenizing various real-world assets. Utilizing UBS’s in-house tokenization service UBS Tokenize, the firm launched a controlled pilot of a tokenized money market fund on the Ethereum blockchain to enable activities like onchain fund subscriptions and redemptions. Elsewhere, the tokenization of funds is a growing trend among traditional funds and asset managers, with large institutions such as Franklin Templeton, KKR, and Hamilton Lane launching tokenized funds already.
• El Salvador announced the launch of Lava Pool, the country’s first Bitcoin mining pool powered entirely by renewable geothermal energy.
• This week Starbucks will release a series of Pumpkin Spice Latte digital stamps via Starbucks Odyssey, the company’s Web3 rewards and loyalty platform. The NFTs will be sold in four varieties to represent the qualities of the physical drinks: Spiced, Whipped, Iced, and Steamed.
• Russian corporations are starting to make use of the digital ruble, the country’s central bank digital currency (CBDC). Per a report from SPB IT RU, the state-run Sirius Innovation Science and Technology Center has opened a corporate digital ruble wallet.
• On Wednesday, October 4, the Bank of Korea, the Financial Services Commission, and the Financial Supervisory Service announced that they would jointly pursue an experiment (‘CBDC usability test’) to build future currency infrastructure.
• JPMorgan has carried out its first live blockchain-based collateral settlement transaction involving BlackRock and Barclays, the U.S. banking giant said on Wednesday October 11. JPMorgan’s Ethereum-based Onyx blockchain and the bank’s Tokenized Collateral Network (TCN) was used by BlackRock to tokenize shares in one of its money market funds. The tokens were then transferred to Barclays Plc for collateral in an OTC (over-the-counter) derivatives trade.
• Switzerland-based crypto infrastructure provider, Taurus, is expanding its presence in Europe after partnering with Deutsche Bank. Taurus, which offers infrastructure for issuing, custodying, and trading crypto, tokenized assets, and NFTs, is opening offices in London and Paris.
• Mastercard, in collaboration with the Reserve Bank of Australia and the Digital Finance Cooperative Research Centre, has announced the latest developments in their central bank digital currency (CBDC) pilot project. The pilot involved a live transaction where an NFT was purchased on the Ethereum blockchain using a “wrapped” version of the CBDC.
• Ferrari is set to accept cryptocurrency payments in the United States, with plans to expand the scheme to Europe in response to customer demand. The company will use crypto payments provider BitPay to process transactions in Bitcoin, Ethereum, and USD Coin.

REGULATORY ROUNDUP: We’re living through the era of regulatory recognition of digital assets. The legislation, litigation, and regulation happening today will dictate the entire future of our industry, and we have a historic chance to shape those changes by staying informed and providing public commentary.

• Hong Kong’s police force and the Securities and Futures Commission (SFC) have formed a joint task force to monitor suspicious activity on cryptocurrency exchanges. The task force was established following a high-level meeting between the two authorities on September 28. Its main objective is to enhance collaboration in monitoring suspicious and illegal activities on virtual asset trading platforms (VATPs). The task force includes members from the police force’s Commercial Crime, Cyber Security Financial Intelligence, and Investigations divisions, as well as representatives from the SFC’s Enforcement and Intermediaries divisions. 
• The Hong Kong Stock Exchange (HKEX) has launched a blockchain-based settlement platform called Synapse, aimed at improving post-trade processes for global investors. Synapse integrates smart contracts using Digital Asset Modelling Language (DAML), a programming language launched by Digital Asset in 2016. 
• The Canadian Securities Regulators (CSA), have provided clarity on their approach to stablecoins, referring to them as value-referred cryptoassets. The CSA announced that they may allow trading of stablecoins tied to a single fiat currency, known as fiat-backed cryptoassets, under certain conditions. These conditions include stablecoin issuers maintaining an adequate reserve of assets with a qualified custodian and disclosing information about their governance, operations, and asset reserves to the public.
• Lawmakers in Taiwan are working towards creating a special law for offshore exchanges by the end of November 2023, according to a report. Yung-Chang Chiang, an official in the Legislative Yuan of Taiwan, stated that the first draft of the law will be available for reading by parliament by the end of November or sooner. Chiang believes that such a law is necessary to regulate crypto-related businesses and address concerns over activity in offshore markets
• Judge Analisa Torres rejected the SEC’s wish for an interlocutory appeal on Wednesday. The denial was made on the grounds that the Judge’s previous order — which gave Ripple a partial win — did not entail an order that “involved a controlling question of law,” which is necessary for the certification of an interlocutory appeal.
• Coinbase is currently embroiled in a critical legal battle with federal regulators, facing allegations of running an unregistered securities exchange that could threaten its very existence. Recent legal submissions may bolster the SEC’s position by asserting its authority to regulate the cryptocurrency domain.
• US Senators, including Elizabeth Warren and Angus King, are urging the IRS to accelerate the implementation of tax reporting regulations for crypto brokers. They argue that the projected two-year timeline for implementation would result in potential lost revenues of $50 billion annually and would not align with the stipulations of the Infrastructure Investment and Jobs Act.
• A second Chinese court has ruled that crypto lending is an activity outside the protection of the country’s legal system. The issue at hand arose from an unpaid stablecoin loan between two individuals. However, the Nanchang People’s Court ruled that the plaintiff was required to prove that Tether is a legally issued fiat currency to bring judicial relief, which the plaintiff was unable to do.

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