The first application for a Bitcoin exchange-traded fund (ETF) was submitted in July 2013 but was denied in both 2017 and 2018. Over the past decade, the Securities and Exchange Commission (SEC) has rejected numerous other applications, continuously postponing decisions on others. Recently, a court ruling deemed the SEC’s rejection of Grayscale’s ETF application “arbitrary and capricious,” causing Bitcoin to surge more than 6%. However, the SEC subsequently delayed its decision on all pending Bitcoin ETFs, resulting in a price drop. Currently, the SEC is deliberating its next move while Grayscale pleads for approval.
The idea of a Bitcoin ETF has some merit in terms of adoption. The ETF industry, valued at $7 trillion, is filled with investors who are still hesitant about entering the world of crypto. They are waiting for a product that would provide them with Bitcoin exposure without the need to directly buy BTC and set up a wallet. Additionally, the crypto community, which has fought hard for digital assets to be taken seriously, would welcome the validation that a US spot ETF would bring.
However, the essence of crypto, especially Bitcoin, is to establish an alternative financial system that promotes financial sovereignty, transparency, and consensus. The eagerness of the crypto industry to obtain SEC approval for an ETF feels like a step backward, similar to American revolutionaries begging Parliament to intermediate colonial tax collection after rejecting its imperial rule.
Mainstream adoption is a common goal among crypto advocates, and SEC approval of a Bitcoin vehicle that aligns with traditional finance seems like a fast track to achieve this. However, seeking approval from a centralized agency for an intermediated investment product contradicts the purpose of the industry and is unnecessary.
The irony lies in cautious investors waiting to buy Bitcoin ETF shares instead of directly purchasing BTC, which is a safer option. ETFs come with multiple layers of counterparty risk, including the sponsor, custodian, and other partners. The recent contagion in the crypto market resulted in customers losing over $10 billion within months due to their reliance on third parties. The lesson learned is that without the private keys to your Bitcoin, you do not have control over your assets, and they may not even exist.
While those who experienced the fallout understand this, investors waiting for an ETF likely do not. It is the responsibility of industry leaders to educate newcomers about the enhanced security and risk aversion that Bitcoin technology provides.
The downside of a spot Bitcoin ETF goes beyond the conceptual contradiction and the unknowing purchase of a riskier investment. The potential cost to the crypto movement is significant. For instance, BlackRock’s iShares Bitcoin Trust, which caused Bitcoin’s price to reach a one-year high in June, has a clause on hard forks that introduces ambiguity into the consensus mechanism. This poses a risk to shareholders who may only have a paper claim to Bitcoin that has been lent out, rather than owning the asset itself.
As decentralized finance (DeFi) and traditional finance continue to coexist, it is inevitable that the SEC will eventually approve a spot Bitcoin ETF. While this is not inherently bad, the Bitcoin community must remain aware of and committed to the reasons behind building a new financial system.
It is essential to embrace the adoption of Bitcoin by legacy institutions and the integration of traditional investment vehicles with Bitcoin. However, we must also be vigilant about the implications of spot ETFs, educate newcomers about the uniqueness of Bitcoin’s technology, and continue to move forward.