US regulators, for the first time, approved exchange-traded funds (ETFs) that invest directly in bitcoin, a move heralded as a landmark event for the roughly US$1.7 trillion digital-asset sector that will broaden access to the most prominent cryptocurrency on Wall Street and beyond.
The Securities and Exchange Commission’s three-part mandate includes investor protection and authorized funds from industry heavyweights BlackRock, Invesco, and Fidelity to smaller competitors, including Valkyrie, to begin trading Thursday.
The approvals also mark a rare capitulation by the SEC following opposition that lasted for over a decade, ever since Tyler and Cameron Winklevoss first proposed a bitcoin ETF in 2013. BlackRock’s surprise application last June, followed by an appeals court ruling that called the denial of a different application “arbitrary and capricious,” triggered a blistering rally in the cryptocurrency as speculation that US regulators would finally give their blessing to the structure.
“While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin,” SEC Chair Gary Gensler said in a statement. “Investors should remain cautious about the risks associated with bitcoin and products whose value is tied to crypto.”
At the crux of the SEC’s previous rulings against a spot, ETF was the argument that no regulated exchange could adequately monitor bitcoin trading in a way that would reliably detect fraud and manipulation. That contention was opposed by Cathie Wood’s Ark Investments, among others, which provided data showing a high correlation between cash trading and the futures contracts that trade on CME Group’s platform.
In reviewing the latest proposals, the SEC said it examined the correlation between spot and futures trading at various time intervals and concluded that prices moved so that irregularities on exchanges such as Kraken and Coinbase were likely to appear in the futures.
“Because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the exchanges’ comprehensive surveillance-sharing agreement with the CME – a US regulated market whose bitcoin futures market is consistently highly correlated to spot bitcoin, albeit not of ‘significant size’ related to spot bitcoin – can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the proposals,” the order said.
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The decision comes a day after a false post on the SEC’s X account claimed that the agency had approved the ETFs. The regulator subsequently said the account had been compromised, causing the bitcoin price to fluctuate widely.
Gensler voted alongside the agency’s two Republicans to back exchanges’ plans to list the products, the SEC’s website showed. The regulator’s two other Democrats voted against the proposals.
Bitcoin rose about 3.4 percent to US$47,500 following the approvals. The original cryptocurrency, which sank 64 percent in 2022, more than doubled in 2023 in large part because of speculation that the SEC would eventually approve ETFs that will allow investors to get exposure to the token in their traditional brokerage accounts instead of one of the crypto-native start-ups that have come under increasing government scrutiny following a series of sector scandals and bankruptcies.
“The approval means that both retail and institutional investors now can diversify their portfolio with crypto exposure without worrying about the complicated issues of custody,” said Campbell Harvey, a finance professor at Duke University. “The ETF makes it easy to add to your portfolio.”
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.Crypto proponents have argued for years that a spot fund that invests directly in Bitcoin would benefit investors and help bring the industry closer to the more highly regulated world of traditional finance. It also suggests a sort of milestone of maturity for the relatively nascent industry, where skirmishes with regulators climaxed after the collapse of Sam Bankman-Fried’s FTX empire highlighted risks lurking in the industry.
The landmark decision comes after Grayscale Investments won a key victory over the SEC. A federal appeals court had overturned the rejection of Grayscale’s application to convert its bitcoin trust into an ETF. The court called the denial “arbitrary and capricious” because the commission failed to explain its different treatment of similar products. ETFs that hold bitcoin futures were approved in 2021.
The SEC’s loss to Grayscale was one of the reasons why the SEC approved the applications, Gensler said in Tuesday’s statement.