Proponents argue that a regulated product, like an ETF, tied to the spot price of the cryptocurrency, offers investors the best way to invest in bitcoin. But the agency has long rejected such products, arguing they fail to meet its bar for investor protections.
But after a court in August ruled the SEC was wrong to reject Grayscale’s application to convert its bitcoin trust into an ETF, the SEC has been engaging with issuers on substantive details, some of which are usually discussed near the end of an ETF application process, according to half a dozen industry executives and SEC public memos.
They include custody arrangements; creation and redemption mechanisms; and investor risk disclosures, said the people, who asked not to be identified because the discussions are private.
A spot bitcoin ETF would mark a watershed for the industry, allowing previously wary investors access to the world’s largest cryptocurrency via the tightly regulated stock market. Demand is expected to be as much as $3 billion on the first few days.
The SEC has long worried, however, that bitcoin is vulnerable to manipulation. Previously, discussions focused on that concern and were mostly educational, the people said.
The SEC has until Jan. 10 to make a final decision on ARK’s filing, which is first in line. The advanced nature of the discussions signals the SEC may approve ARK’s application and likely some of the other 12 applications, in the New Year, the people said. The advanced talks help explain a recent rally in bitcoin, the price of which reached a 20-month high this month.
ARK CEO Cathie Wood told Yahoo Finance last month that the nature of the SEC discussions had changed and the odds of several applications being approved had gone up.
“My guess is that we’ll have several ETFs approved at once, which will give investors the best opportunity to compare them,” said Bryan Armour, ETF analyst at Morningstar.
Memos made public by the SEC show that executives from BlackRock, Grayscale, Invesco and 21 Shares, which is working with ARK, have met with SEC staff since September, together with their lawyers and executives from the exchanges where they hope to list the ETF. Other managers also told Reuters they met with SEC staff in that time. The BlackRock meeting memo includes a detailed description of the asset manager’s revised redemptions mechanism.
BlackRock did not return requests for comment. Invesco declined to comment. “Grayscale continues to engage constructively with the SEC,” a spokesperson said.
While past meetings have mostly been with staff from the SEC’s trading and markets and corporate finance divisions, some recent meetings have been with staff in Chair Gary Gensler’s office, according to the memos and sources. The pace of SEC information requests has also accelerated from every few months to every week or so, the people said.
As discussions have advanced, issuers have had to update their filings to reflect the new details, one person said. This week, for example, BlackRock amended its filing to provide more insight into measures it plans to take to protect investors.
Crypto skeptic
To be sure, the SEC has not said publicly – or indicated to people interviewed by Reuters – whether it will approve the products. There also remain sticking points, chiefly whether issuers will create a cash or an “in-kind” settlement mechanism, the people said.
An SEC spokesperson said the agency would not comment on individual filings. Gensler, a crypto skeptic who has accused the industry of flouting SEC rules, said in October the agency’s commissioners will potentially consider the ETF filings, but he did not indicate when.
The SEC began engaging meaningfully with issuers soon after a federal appeals court ruled that the agency failed to justify why it rejected Grayscale’s ETF application. The SEC did not appeal and must now review Grayscale’s filing.
Some sources believe the wording of the Grayscale ruling limits the grounds on which the SEC could again reject the filings. And many issuers feel they have addressed the SEC’s market manipulation concerns with a surveillance arrangement between the listing exchanges and Coinbase (COIN.O), the largest U.S. cryptocurrency exchange.
If the SEC wants to buy more time, it could ask ARK to withdraw its application and refile, but market participants said that could be legally risky in light of the Grayscale decision.
“I don’t think much will stop it from moving forward,” said Roxanna Islam, head of sector and industry research at data firm VettaFi.
