The Securities and Exchange Commission (SEC) has been grappling with the decision to approve a Bitcoin exchange-traded fund (ETF) for over a decade. The first ETF application was filed in July 2013, but it was denied by the SEC in 2017 and 2018. Since then, the SEC has rejected multiple applications and continually delayed decisions on others.
Recently, the SEC’s rejection of Grayscale’s ETF application was deemed “arbitrary and capricious” by a court ruling. This led to a 6% surge in the price of Bitcoin. However, the SEC promptly delayed its decision on all pending Bitcoin ETFs, causing the price to drop again. Now, the industry waits for the SEC’s next move, while Grayscale pleads for approval.
Advocates for a Bitcoin ETF argue that it would promote mainstream adoption of cryptocurrency. The ETF industry, with its $7 trillion market cap, offers an avenue for investors to gain Bitcoin exposure without directly owning the asset or setting up a digital wallet. Furthermore, the crypto community sees a US-based ETF as validation for digital assets in the traditional financial system.
However, there is a paradox in seeking approval from a centralized agency for a technology that aims to create an alternative financial system. Bitcoin was created to enable financial sovereignty, transparency, and consensus, which are lacking in traditional finance (TradFi). The eagerness for an SEC-approved ETF can be seen as a step backward, akin to the American revolutionaries asking for colonial tax collection mediation after rejecting imperial rule.
The downside of a Bitcoin ETF goes beyond the conceptual contradiction. ETFs introduce various layers of counterparty risk, including the sponsor, custodian, and other partners involved. The risk of trusting third parties was evident during the recent contagion, where customers lost billions due to their assets not being under their control. The crypto community, as industry builders and veterans, should educate newcomers about the security and risk aversion offered by Bitcoin’s technology.
Moreover, the potential costs for the crypto movement are significant. For example, BlackRock’s iShares Bitcoin Trust, which gained support from the crypto community, has a clause on hard forks. This clause introduces ambiguity around the consensus mechanism, despite Bitcoin’s well-defined and battle-tested mechanism. Furthermore, a large institutional entity like BlackRock amassing a significant Bitcoin supply raises concerns about opacity and possible rehypothecation, leaving shareholders with only a paper claim to Bitcoin.
Ultimately, it is inevitable that the SEC will approve a spot Bitcoin ETF as decentralized finance and TradFi coexist. However, it is crucial for the Bitcoin community to remain conscious of the reasons behind building a new financial system. While embracing legacy institutions’ adoption of Bitcoin, it is essential to educate market newcomers about the unique qualities and benefits of Bitcoin’s technology.
In conclusion, the quest for a Bitcoin ETF signifies the desire for mainstream adoption, but it also highlights the need to balance traditional financial structures with the principles of Bitcoin. The industry should advocate for the benefits of owning Bitcoin directly and emphasize the importance of self-custody in a transparent and immutable ledger.