U.S. Banks Seek Rule Changes For Bitcoin ETF Inclusion (2024)

U.S. banking groups seek entry into Bitcoin spot ETFs, urging SEC for a rule change for participation in the market. Several prominent U.S. banking groups are actively pursuing entry into the Bitcoin Exchange-Traded Funds (ETFs) landscape, prompting a collective plea for a rule change to facilitate their participation in the bitcoin spot ETFs space.

On February 14, a coalition of influential trade groups, including the Bank Policy Institute, the American Bankers Association, the Securities Industry and Financial Markets Association, and the Financial Services Forum, submitted aletter to the Securities and Exchange Commission (SEC) advocating for specific modifications….Story continues….

By: Anisha Pandey

Source: US Banks | Bitcoin Spot ETFs | Request For A Rule Change

Critics:

Spot bitcoin ETFs offer a regulated and accessible way for mainstream investors to invest in the digital currency. However, expenses like management fees and brokerage commissions still apply, though these are offset by not having the costs in time and exchange fees to buy and hold bitcoins directly.

Spot bitcoin ETFs securely hold bitcoins in a secure digital vault, which registered custodians manage.2The purpose of this kind of ETF is to mirror the price of bitcoins in the crypto market. To get started, the ETF buys bitcoins from other holders or through authorizedcryptocurrency exchanges. The tokens are then stored in adigital wallet, often using several layers of security, including cold or offline storage, to reduce risks like hacking.

The ETF then issues shares corresponding to a set number of bitcoins it holds. The ETF share price should reflect the prevailing market price of the cryptocurrency, and the shares are available for public trading on traditional stock exchanges. So the ETF shares track the price of bitcoins as closely as possible, and the ETF occasionally rebalances its holdings by buying or selling tokens.

This process of creation and redemption is done byauthorized participants (APs). These are typically large financial institutions, which create or redeem shares of the ETF based on market demand. If the ETF shares are trading at a premium or discount to the actual price of bitcoins, then the APs create or redeem ETF shares in large blocks, essentiallyarbitragingthe difference so that the ETF share price alignments with the cost of bitcoins.

Spot bitcoin ETFs and derivatives-based bitcoin ETFs differ in how they are structured and how much exposure they offer to bitcoin’s price changes. Spot bitcoin ETFs directly hold bitcoins, butderivatives-based bitcoin ETFsuse financial instruments like futures contracts to replicate bitcoin’s prices.

Spot bitcoin ETFs thus have direct ownership of bitcoins. This exposure is more intuitive for investors, making spot bitcoin ETFs more straightforward for those investing in bitcoin. Spot bitcoin ETFs can thus be more transparent since each share of the ETF corresponds to a specific number of bitcoins held.

By contrast, derivatives-based ETFs can be more opaque for investors, given that their value is derived indirectly from futures contracts, which can be influenced by various market factors beyond bitcoin’sspot price.A major benefit of spot bitcoin ETFs is their accessibility to a broader range of investors. Spot bitcoin ETFs substantially lower the barriers to entry into the crypto market.

Investors are excused from managing wallets with bitcoins, navigating online crypto exchanges, or grappling with private and public keys. Removing these technical hurdles simplifies asset management, making it a more attractive proposition for those accustomed to traditional investments.

The U.S.Securities and Exchange Commission (SEC)approved11 spot bitcoin ETFson Jan. 10, 2024. Until then, the regulators had been reluctant to approve any spot bitcoin ETF applications, citing concerns over market manipulation, fraud, custody, and investor protection.

The SEC had previously rejected several applications for a spot bitcoin ETF byGrayscale Investments, a leading digital asset manager. In August 2023, a federal appeals court ruled that the SEC was wrong to reject Grayscale’s application and had not sufficiently explained its reasoning.

However, the SEC decided not to appeal the ruling. In January 2024, the regulator announcedapprovalfor Grayscale’s application, as well as other applications by major industry players such as Bitwise, BlackRock iShares, WisdomTree, ARK 21Shares, and Invesco Galaxy, among others.

All 11 ETFs began trading on Jan. 11, 2024, including Grayscale’s. SEC Chair Gary Gensler released a warning, along with the approval.”While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto,” said Gensler in a statement.

Spot bitcoin ETFs represent a significant evolution in cryptocurrency, offering a regulated and simplified way to gain exposure to bitcoin’s prices.By potentially enhancing market liquidity, aiding in better price discovery, and attracting more institutional participation, spot bitcoin ETFs could play a pivotal role in stabilizing and boosting bitcoin adoption. However, the ripple effects of increased demand and speculative trading could also lead to worries about anovervaluationof the currency.

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