Why do people say “If anyone can get a BTC ETF approved, it’s BlackRock”?

Are we about to witness a wave of spot Bitcoin exchange-traded funds (ETFs)? If you’ve been in the cryptocurrency industry for a while, you’ll know that ETFs have long been seen as the key to building a broad market for digital assets. Recently, even a major institution, including BlackRock, submitted a proposal to establish such a vehicle, sparking hopes. If a leading institution like BlackRock enters the Bitcoin ETF, then the emergence of the first cryptocurrency ETF in the United States must not be too far away.

However, according to some experts contacted by CoinDesk , we may still have to wait a while.

At the same time as BITX was approved, a number of institutions submitted a series of applications for spot Bitcoin ETFs to the SEC, stating that they would reach a monitoring sharing agreement with Coinbase , including an application from BlackRock Group. Bitcoin (BTC) briefly climbed above $31,000 after a surge in ETF applications, only because the entry of BlackRock Group, the world's largest asset management company with more than $10 trillion in assets under management, reflected the market sentiment of "how could the SEC reject this financial giant" and "no doubt BlackRock Group submitted the application only because they knew it would eventually be approved."

Matt Hougan, chief investment officer of Bitwise Asset Management, told CoinDesk TV: “When BlackRock enters the market, you have to ‘listen.’” Like BlackRock, Bitwise has also resubmitted its application for a bitcoin spot ETF. And brokerage firm Bernstein also mentioned that the SEC’s position on spot bitcoin (BTC) ETFs is difficult to uphold, and the probability of approval is quite high.

But Octavio Marenzi, CEO and founder of Opimas LLC, and others said the application was doomed to fail. “They have identified a custodian that the SEC itself has determined is operating illegally... I don’t quite understand how BlackRock can make this a reality,” Marenzi said.

It’s been a decade since the cryptocurrency industry first sought to launch a spot Bitcoin ETF, and one person with intimate knowledge of the process doesn’t think any approval will come anytime soon .

Volatility Shares ’ 2x Bitcoin Strategy ETF (BITX) became the first leveraged cryptocurrency ETF available in the United States on June 27, with SEC Chief Investment Officer Stuart Barton at the helm of its carefully filed application.

"The delay is because of the unregulated nature of cryptocurrency exchanges," Barton said. "It takes a long time for an exchange to become a regulated exchange. It's a multi-year process. It's a step before an ETF is approved. Right now, no exchange that trades Bitcoin is regulated."

CoinDesk also spoke with two other industry experts — James Koutoulas, a traditional hedge fund manager who is fighting the SEC and is currently fighting an SEC subpoena related to a political memecoin targeting Joe Biden and Jai Waterman, and Jai Waterman, CEO of crypto asset trading platform Blockstation.

Both of them expressed skepticism about the idea of ​​an immediate U.S. approval of a spot Bitcoin ETF. Based on Koutoulas’ experience in the ongoing legal battle with the SEC, he said that while the crypto community’s optimism is justified, he is not 100 percent sure that it will be ultimately approved.

“It’s not a done deal whether an ETF will be approved,” Koutoulas said. “You just have to look at the conflicts (such as the lawsuit against Coinbase).” Waterman said the SEC is in a difficult position and faces political pressure, but it will “take a long time.”

“Until the Coinbase lawsuit is resolved or thrown out, the ETF will not be approved,” Waterman said. “They may turn to another institution instead of Coinbase, but that is also difficult because regulators want to find an institution with a good reputation and no ongoing litigation.”

However, BlackRock CEO Larry Fink seems convinced. Not only has he said that enthusiasts of the asset class rely heavily on it for “illegal activities,” he has also said that Bitcoin could “transform the financial system.” But his recent comments suggest that even he thinks ETF approval will take time.

“We’re hopeful that, as we’ve done in the past, we can work with the regulators and get approval one day, and I don’t know when that will be, but we’ll see how all of this plays out,” Fink said earlier this month.

According to experts, in addition to the approval of leveraged products, BlackRock's application and the subsequent market optimism, the XRP verdict has put collective pressure on the SEC. Last week, a US court partially ruled in favor of Ripple, holding that sales of Ripple's XRP tokens on exchanges and through algorithms do not constitute investment contracts. "The XRP verdict may support Coinbase's case," Waterman said. "This may be another pressure point in addition to these ETF applications. However, I think the SEC will appeal the Ripple verdict."

Koutoulas said the XRP verdict dealt a very severe blow to the SEC because it confirmed everything the crypto legal community had been arguing about the SEC’s overreach. “Within hours of their significant losses on XRP, the SEC rushed to harass me with a subpoena, admitting that ‘the question of whether our meme coins are securities is for another time to be decided,’” Koutoulas quoted from the SEC’s subpoena.

“It is clear that this subpoena does not involve a legitimate investigation, but rather weaponizes the federal government against cryptocurrency and political opponents.”

Lawyers for crypto asset manager Grayscale criticized the regulator for approving Barton's leveraged Bitcoin ETF after rejecting its spot Bitcoin ETF application, adding more pressure on the SEC. They wrote to the D.C. Circuit Court of Appeals, alleging that the leveraged ETF approved by the SEC is "even more dangerous than Grayscale's own spot Bitcoin ETF." Grayscale is in litigation with the SEC over the rejection of its own spot Bitcoin ETF application. (Note: Grayscale is a subsidiary of DCG and the parent company of CoinDesk.)

Barton said the process for approving a leveraged ETF and a spot Bitcoin ETF is different. “The difference between our leveraged ETF and the spot Bitcoin ETF is that our ETF tracks Bitcoin futures traded on a regulated exchange, the Chicago Mercantile Exchange (CME), while the proposed Bitcoin spot ETF plans to reference Bitcoin Cash, which is not traded on any regulated exchange,” Barton explained.

Barton said the methodology for getting a spot Bitcoin ETF approved is very difficult because there is a listing rule - 19 b-4. This rule requires self-regulatory entities to seek approval from the SEC before making any trading rule changes. In this case, Nasdaq and Cboe's BZX exchange are seeking to take over compliance responsibilities because the selected monitoring partner, Coinbase, is an unregulated exchange and does not meet SEC requirements. As part of this rule change, Nasdaq and Cboe BZX plan to fulfill some of Coinbase's compliance obligations through a monitoring sharing agreement. Coinbase is currently an unregulated exchange and therefore does not meet SEC requirements.

“The challenge with an ETF filing that requires a 19 b-4 is that the exchange needs a specific approval decision from the SEC to proceed with the listing, which puts the SEC in a very powerful position,” Barton said.

“Not only do exchanges have to prove that the ETF complies with a certain set of ETF rules, they have to answer a much broader set of questions from the SEC because they’re essentially asking them ‘please allow us to change the exchange rules in order to list this new product as a new ETF,’ and very few 19 b-4s are filed and it’s a very lengthy process.”

Cboe's five ETF applications -- Wise Origin, WisdomTree , VanEck , Invesco Galaxy and ARK 21 Shares, and BlackRock's iShares Bitcoin Trust -- have all filed 19b-4s. "The weakness of a 19b-4 application is that you need specific approval from the SEC to list, which puts the SEC in a very strong position," Barton said. "They don't have to argue with you about whether this is a good investment. They can dig deep because you're essentially asking them 'please allow us to change the exchange rules to list this new underlying product as a new ETF,' and very few 19b-4s are filed, and it's a very lengthy process."

Normally, when you’re fighting a regulator, you try to take the easiest path, and this is a very difficult path to market. Asked why BlackRock filed, despite the odds, Barton said it wanted to be first in case pressure got to the SEC.

“ If anyone can get approval, it’s BlackRock, ” Koutoulas said. “That’s because BlackRock has had about 500 ETF applications approved, only one permanently rejected, and the U.S. government does a lot of business with BlackRock.”