By David Wachsman, CEO and Founder of professional services firm Wachsman
Few things in the blockchain world have drawn quite so much attention, inspired so much speculation, or made so many headlines as the prospect of bitcoin making its way to traditional financial markets. Many financial services firms and digital asset exchanges have submitted proposals to the U.S. Securities and Exchange Commission (SEC), requesting the approval exchange-traded funds, or ETFs, for bitcoin.
Many hours of constructive dialogue between the regulator and applicants have ensued. But so far, no bid to run an ETF has been successful.
In spring this year though, change might be in the air: many industry experts believe that the first ETF is on its way. What that might mean for blockchain in general and cryptocurrency in particular is a hotly debated question.
For a while, it seemed like February 2019 might mark the inauguration of the first bitcoin ETF. The SEC had pledged to respond to a VanEck-sponsored ETF by February 27, but the fund’s sponsor withdrew the request for evaluation in the middle of January. VanEck plans to refile: the proposal was “temporarily withdrawn” in January, but it was not abandoned.
The month-long government shutdown that ran from late December through the middle of January may have been a contributing factor to the withdrawal, but the salient point is that regulators work on an iterative model with applicants. They’re learning from past discussions, and each new submission presents a more compelling case than its predecessor.
So what has the SEC said about bitcoin-based financial instruments? Though February passed without an ETF, cause for optimism remains. SEC Chairman Jay Clayton cautions that market manipulation remains a concern , but Clayton’s colleagues have been more vocally optimistic. SEC commissioners have been quoted on record that they expect the Commission will eventually approve an ETF, though they’ve been too discreet to predict the underlying structure that will prove successful.
Past refusals have disappointed, but not deterred, the staunchest ETF supporters. The SEC decided against nine proposed funds last year, but more are already in the queue for 2019, and other contestants will likely follow. For example, although the SEC denied Gemini’s July 2018 ETF bid, the company plans to continue its efforts. In January of this year, Co-founder Cameron Winklevoss averred that “We are as committed as ever to making an ETF a reality” and that Gemini had taken several steps, including implementing Nasdaq SMARTS Market Surveillance tech in their exchange.
Thus far, in cryptocurrency there are no formalized exchange architecture requirements; traditional commodities and exchanges must adhere to the same rules. Most commodities dealers expect infrastructure consistency across exchanges; cryptocurrency has yet to achieve this standardization.
Aside from questions about the timing and proprietor of an ETF, questions remain about the composition of any approved funds. Although most market and crypto community excitement emphasizes a “full” ETF, there have been suggestions that the first crypto ETF may be “partial” funds that include bitcoin as only a small part, perhaps 15 percent , of an asset mix.
Though many in finance and blockchain continue to rest their hopes on a “full” ETF, even a mixed fund would represent a huge step forward and would prompt regulators and exchanges to finalize infrastructure and market surveillance rules.
One question remains: what would happen to bitcoin itself if an ETF were to be approved? Bitcoin has been markedly stable the past few months and there are many potential reasons for this, but one may well be the perceived approach of a successful bitcoin ETF bid. I’ve been in the industry long enough to recognize milestones, and I suspect that the approval of an ETF would be a major marker in the development and maturation of the industry.
An ETF would be the first step on the path to fulfilling retail and institutional investors’ hopes for improved stability. Both retail and institutional financial tech companies would gain new customer and revenue streams.
In its first 10 years, blockchain grew from a niche experiment positing a new method for financial freedom into a multibillion dollar industry. Markets are thriving, use cases are multiplying, and public awareness of blockchain grows daily. Every year has seen blockchain technology grow, change, and improve; the approval of a cryptocurrency ETF would be the sea change that marked the true start of blockchain’s second decade.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.