Comments not likely to sway SEC to approve Bitcoin ETF

The Securities and Exchange Commission is seeking public input on whether to approve an exchange-traded fund based on the spot price of the digital token Bitcoin, but the comments aren't likely to persuade the regulator to approve the product.

Last Friday, the SEC released a request for comment regarding Grayscale Investments' application to list and trade shares of its Grayscale Bitcoin Trust. The value of the ETF shares would reflect the value of Bitcoins held by the trust. Last Tuesday, the SEC released a similar comment request on a proposal for Bitcoin exchange-traded product from Bitwise.

The SEC is seeking written public feedback on whether the Bitcoin ETF would be susceptible to manipulation and on the liquidity and transparency of the Bitcoin markets, among other questions. The deadline will be 21 days from the publication of the comment request in the Federal Register.

But the agency’s outreach doesn’t make it any more likely a Bitcoin ETF will be approved, said Timothy Massad, a former chairman of the Commodity Futures Trading Commission.

SEC Chairman Gary Gensler “has been very skeptical about what I will call cash ETFs,” said Massad, a research fellow at the Harvard Kennedy School of Government. “They may just want to see what people say and get some input. I suspect he’s thinking more about how to assert the SEC’s jurisdiction over these cash exchanges.”

Jaret Seiberg, a managing director at Cowen Washington Research Group, said that although the SEC could have simply rejected the Grayscale application, issuing a request for comment doesn’t mean it’s leaning in the other direction.

“Instead, we see the SEC as using comments to protect itself in case Grayscale challenges a rejection in court,” Seiberg wrote in an analysis.

The questions the SEC outlines in the comment request indicate the agency continues to have misgivings about a Bitcoin ETF, said Richard Kerr, a partner at the law firm K&L Gates.

“They’re trying to make an assessment of whether this specific product would be subject to manipulation in the market,” Kerr said. “In laying out these questions, it’s clear they still see significant hurdles in approving a spot ETF because they’re concerned there’s potential for manipulation.”

The SEC has rejected several Bitcoin ETF proposals because of concerns about potential investor harm tied to a crypto market it does not regulate. The agency has approved funds based on Bitcoin futures contracts, which is a market overseen by the CFTC.

Although the Bitcoin market has been volatile over the last several weeks, the cryptocurrency remains popular. A Bitcoin ETF would allow ordinary investors to participate in the crypto markets without owning the currency themselves.

The American Securities Association intends to file a comment letter supporting a spot Bitcoin ETF and calling on the SEC to treat Bitcoin like a commodity regulated by the CFTC.

“American investors deserve the freedom to choose to participate in this innovative asset class, and they now have the opportunity to make their voices heard through the SEC’s comment process,” ASA Chief Executive Chris Iacovella said in a statement. “We hope this will only accelerate much-needed regulatory clarity for the crypto market.”