Are we about to see a wave of spot bitcoin exchange-traded funds (ETF)?

If you’ve been in crypto for a while, you’ll know that ETFs have long been considered key for building a broad-based market for digital assets. And recent news that BlackRock, no less, had submitted a proposal to set up such a vehicle raised hopes. If a bellwether, well-connected institution like BlackRock was getting into Bitcoin ETFs, surely an approval, and the first U.S. crypto ETF, couldn’t be far off.

Well, we may have to wait a little while yet, according to a range of experts contacted by CoinDesk. 

Around the same time as BITX’s approval, institutions filed a spate of applications for spot bitcoin ETFs  with the SEC that stated they would enter into a surveillance-sharing agreement with Coinbase, including one from BlackRock. Since Bitcoin (BTC) briefly climbed above $31,000 after the flurry of ETF filings, the entry of the world’s largest asset manager with more than $10 trillion in assets under management (AUM), reflected a “how-will-the-SEC-turn-this-financial-giant-down” and a “surely-BlackRock-is-filing-only-because-they-know-it’ll-eventually-happen” kind of market sentiment.

You have to “listen” when BlackRock comes to the market, Bitwise Asset Management Chief Investment Officer Matt Hougan told CoinDesk TV. Like BlackRock, Bitwise also refiled for a bitcoin spot ETF. And brokerage firm Bernstein added to the expectations when it said the SEC’s stance on spot bitcoin (BTC) ETFs is a difficult one to hold, and the probability for approval is fairly high.

But others like Opimas LLC CEO and founder Octavio Marenzi said the application is dead on arrival.“ They’ve identified a custodian for the assets that the SEC itself has said is operating illegally…I don’t quite see how BlackRock makes this happen,” Marenzi said.

It’s been a decade since the crypto industry first sought to launch a spot bitcoin ETF and one person who understands the process intimately doesn’t see any approvals any time soon.

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

“The hold-up is because of the unregulated nature of the crypto exchanges,” said Barton. “It takes a long time for an exchange to become regulated. That is a multiyear process. That’s a step before we get to an ETF approval. At the moment, there’s no exchange on which bitcoin trades that is regulated.”

CoinDesk also spoke to two other industry experts – hedge fund manager James Koutoulas who is currently fighting the SEC’s motion to subpoena him over and a political meme coin targeting Joe Biden and Jai Waterman, CEO of crypto-asset trading platform Blockstation.

They both poured cold water on the idea of an immediate spot bitcoin ETF approval in the U.S. Koutoulas, based on the experience of his ongoing troubled legal situation with the SEC, said that while the crypto community’s optimism is justified, he’s not sure it’s going to be 100% founded in eventual approval.

“It’s not a foregone conclusion that an ETF will be approved,” Koutoulas said. “You just have to look at the conflicts (example: lawsuit against Coinbase)  for that.”Waterman said the SEC is in a difficult position with political pressure but it’s still “going to take a long time.”

“The ETFs will not be approved until the Coinbase lawsuit is settled or squashed,” Waterman said. “They may transition and use somebody else instead of Coinbase but that’s also difficult because regulators will want an organization with strong credibility and no ongoing lawsuit against them.”

BlackRock’s CEO Larry Fink seems convinced, however. He has gone from saying fans of the asset class heavily used it for “illicit activities” to saying bitcoin could “revolutionize the financial system” but a recent comment indicated that even he thought an ETF approval could take time.

“We hope that, like in the past, we could be working with our regulators and get the filing approved one day, and I have no idea what that one day will be, but we’ll see how that all plays out,” Fink said earlier this month.

In addition to the approval of the leveraged product, BlackRock’s application and the subsequent market optimism, the XRP ruling has put collective pressure on the SEC, according to experts. Last week, a U.S. court ruled partly in Ripple’s favor saying the sale of Ripple’s XRP tokens on exchanges and through algorithms did not constitute investment contracts.“The XRP ruling could support Coinbase’s case,” said Waterman. “That could be another point of pressure on top of these ETF applications. However, I do think the SEC will appeal the Ripple decision.”

Koutoulas said the XRP ruling has dealt a very sharp blow to the SEC because it confirms everything the crypto law community has been arguing in terms of the SEC’s overreach. “Merely hours after their devastating loss in XRP … the SEC rushed into court to harass me with a subpoena, admitting ‘the question of whether or not our political meme-coin is a security is for another day,’” Koutoulas said, quoting the SEC’s subpoena.

“Clearly this subpoena isn’t about a legitimate investigation, it’s about weaponizing the federal government against cryptocurrency and political opponents.”

Lawyers for crypto asset manager Grayscale added more pressure on the SEC when they criticized the regulators for approving Barton’s leveraged bitcoin-based ETF after having rejected Grayscale’s spot bitcoin ETF application. They addressed a letter to the U.S. Court of Appeals for the District of Columbia Circuit alleging that the SEC approved a leveraged ETF “that is even riskier” than Grayscale’s own spot bitcoin ETF. Grayscale has been embroiled in a lawsuit with the SEC over rejection of its own spot bitcoin ETF application. Grayscale is a subsidiary of Digital Currency Group, CoinDesk’s parent company.

Barton said the process to approve a leveraged ETF and a spot-bitcoin ETF are just different. “The difference between our leveraged ETF and a spot-bitcoin ETF is that our ETF tracks bitcoin futures that trade on a regulated exchange, the Chicago Mercantile Exchange (CME), but the proposed bitcoin spot-ETF plans to reference bitcoin cash which is not traded on any regulated exchange,” Barton explained.

The CME replaced Binance as the world’s biggest bitcoin futures platform in 2021.

Barton said the methodology in place for the approval of spot-bitcoin ETFs puts the SEC in a very powerful position because of a listing rule – 19b-4. The rule requires self-regulated entities to seek the SEC’s approval before making any changes to trading rules. In this case, NASDAQ and the Cboe’s BZX Exchange are asking to take over compliance responsibilities given, Coinbase, the chosen surveillance partner is an unregulated exchange, does not satisfy the SEC’s requirements. As part of this rule change, NASDAQ and Cboe BZX are looking to fulfill some of Coinbase’s compliance obligations through a surveillance-sharing agreement. Coinbase is so far an unregulated exchange, and therefore presently does not satisfy the SEC’s requirements.

“The challenge of an ETF application that needs a 19b-4 is that the exchange needs a specific approval ruling from the SEC to list, and that puts the SEC in a very powerful position,” said Barton.

“The exchanges don’t only have to argue that the ETF falls under a certain set of ETF rules, but also have to answer a far broader set of questions from the SEC because they’re really asking them ‘please can we change the rules of our exchange in order to list this new product as a new ETF’ and very few 19b-4s get filed and can be a very long process.”

All five of Cboe’s ETF applications: Wise Origin, WisdomTree, VanEck, Invesco Galaxy and ARK 21Shares, and BackRock’s iShares Bitcoin Trust have filed 19b-4 applications. “The weakness of an application that needs 19b-4 is that you need a specific approval ruling to list from the SEC and that puts the SEC in a very powerful position,” said Barton. “They don’t have to argue with you on whether this is a good investment. They get to drill down because you’re really asking them ‘please can we change the rules of our exchange in order to list this new underlying product as a new ETF’ and very few 19b-4s get filed and it’s a very long process.”

Normally when you’re going up against a regulator you try to take the easiest route and this is a very hard route to market. Asked why BlackRock applied despite the hard route, Barton said it wants to be first on the off-chance the pressure gets to the SEC.“

Overwhelmingly, the experts interviewed by CoinDesk predicted that while it’ll take time, and perhaps longer than the crypto community thinks, BlackRock’s best suited to be placed first in the ETF race.

“If anyone’s going to get approved it’ll be BlackRock,” Koutoulas said. “(Because) of BlackRock’s track record of having about 500 ETF applications approved and only one permanently rejected, and that the U.S government does so much business with BlackRock.”

Such an organization can “stand the test of time and they can work on this for years to come. They might have to tweak and adjust but eventually with the necessary financial resources, they’ll get it done,” Waterman said.

While BlackRock may be considered a favorite by many, Barton points out that smaller organizations often have an advantage in being nimble.