The SEC Talks to Bitcoin ETF Contenders — Here’s What They’re Likely to Say

The SEC appears to be in fruitful discussions with Spot Bitcoin ETF Applicants.

In late November, cryptocurrency asset manager Grayscale and Wall Street giant Blackrock both confirmed meetings with the SEC to discuss their Bitcoin ETF applications. Both companies have since filed amendments to their applications in the form of S-1 filings. Although these amendments are not exactly the same as having a transcript of those meetings, they do provide some clues about what the securities regulator is saying.

Moreover, the amendments indicate that the SEC is carefully considering these requests, rather than rejecting them outright as it has done many times in the past — often citing potential manipulation of the Bitcoin market in its rejection of the investment product.

BlackRock filed a second amendment to its initial June S-1 filing last night. The application for the iShares Bitcoin Trust, which would provide investors exposure to BTC without having to purchase and hold the asset directly, now specifically mentions the US Fedwire and Society for Worldwide Interbank Financial Telecommunication instant settlement system, or SWIFT network.

Potential Fedwire and SWIFT outages have always been mentioned as risks in BlackRock’s agreement to use Coinbase Prime as its prime broker. But they are now included in a section that is much longer and more specific about the reasons why ETF share redemptions may be suspended and how investors will be notified.

Other reasons include “disruption or disconnection of the Bitcoin network, hacking, cybersecurity breach, or outage of power, the Internet, or the Bitcoin network,” according to a Dec. 4 Securities and Exchange Commission filing. It’s all the language that was in the October amendment to the S-1 filing, but now written to more clearly state that it could trigger a suspension of stock redemptions.

If BlackRock’s Bitcoin ETF were to dissolve, it would not give investors the BTC they purchased with their funds. The S-1 filing now states that the underlying Bitcoin will be liquidated and distributed to investors for cash — “contributors are not entitled to any of the Fund’s underlying Bitcoin holdings.”

Another new section specifies that market makers from whom the fund buys bitcoin are required to conduct due diligence to ensure that the funds “were not derived from or associated with illegal or criminal activity.” It’s a timely addition. Last month, Binance paid $4.3 billion to settle federal charges. Among them was an allegation that the cryptocurrency exchange had weak money laundering controls.

It appears that the regulator was also interested in how shareholders could obtain reliable intraday price information.

To this end, BlackRock’s filing has become more detailed in explaining that investors can use… CME CF Bitcoin indicator real time, or BRTI, which is “updated every 15 seconds” during the regular Nasdaq market session from 9:30 a.m. to 4:00 p.m. ET. This rhythm is an industry standard for determining the intraday value of exchange-traded funds, but it appears to be something the SEC wanted to make clear to traders.

The Chicago Mercantile Exchange launched the BRTI real-time price index in… 2018writing at the time in an announcement that it was “accelerating the professionalization of Bitcoin trading and continuing to establish cryptocurrencies as a new asset class.”

Previous releases of BlackRock’s filings mentioned the CME CF Bitcoin Benchmark and Benchmark Index. Despite the similarity, these two references are published once a day with trading expiring in a few major financial markets such as Hong Kong, London and New York.

A BlackRock filing shows that the Wall Street giant has already sold $100,000 worth of stock to an anchor investor at $25 per share. It’s not an implicit endorsement by any means, but it is a signal that the asset manager feels bullish enough to acquire an ETF.

The new iShares Bitcoin Trust filing now also reveals that Coinbase Custody, the preferred custodian of most Bitcoin ETF applicants, has insurance coverage of up to $320 million to cover “losses of digital assets it holds on behalf of its clients.” “ However, BlackRock does not guarantee that coverage or that shareholder losses are covered by the company’s policy.

A section on custodian obligations also now specifies a narrow set of circumstances under which Coinbase is expected to cover shareholder losses: “In general, a Bitcoin custodian is only liable under a custodian agreement in the event of its negligence, fraud, or material damages.” Violation of applicable law or willful misconduct.”

For Bitwise, which also filed an amendment to its Bitcoin ETF order yesterday, some of the changes are more obvious. The name of the potential fund has been changed from “Bitwise Bitcoin ETP Trust” to “Bitwise Bitcoin ETF.”

Other changes to the Bitwise app cover much of the same ground that Blackrock does by clarifying the risks of investing in a trust that buys Bitcoin.

Although the SEC still has another month to go before it makes a decision on any Bitcoin ETF applications, investors are dumping cash into exchange-traded cryptocurrency products at a dizzying pace. Last week saw $176 million enter crypto ETFs. If investors deposit money at the same rate this week, the total amount within three months could reach nearly $2 billion.

There are still no guarantees that the market will have a spot Bitcoin ETF anytime soon. But the latest changes add a little more context to the wave of delays announced last month.

Edited by Guillermo Jimenez