Home / Bitcoin / Brokerage Firm Bernstein Backing Bitcoin Spot ETF, But Exchanges Like Coinbase are the Problem
Bitcoin
6 min read

Brokerage Firm Bernstein Backing Bitcoin Spot ETF, But Exchanges Like Coinbase are the Problem

Last Updated July 4, 2023 4:52 PM
Omar Elorfaly
Last Updated July 4, 2023 4:52 PM

Key Takeaways

  • A spot Bitcoin ETF is yet to be approved in the United States.
  • The SEC is concerned that ETF’s tied to exchanges are unregulated.
  • Brokerage firm Bernstein suggests SEC wants more mainstream participants involved.

The possibility of a first spot Bitcoin exchange-traded fund in the United States has been hampered by reservations towards existing spot exchanges by the Securities and Exchange Commission (SEC).

A research report from brokerage firm Bernstein  suggests that while the SEC has highlighted concerns around the depth of the Bitcoin market across exchanges, the agency could well approve the latest submissions for a true spot Bitcoin ETF.

The report highlights the SEC’s belief that a spot Bitcoin ETF would be undependable due to the fact that spot exchanges “are not under its regulation, and thus spot prices are not reliable and prone to manipulation.”

Coinbase has been listed by both the CBOE and NASDAQ in filings for proposed Bitcoin ETFs from the likes of BlackRock, Fidelity and other big name asset managers. 

Amended Bitcoin ETF applications

The Chicago Board Options Exchange (CBOE) refiled its Bitcoin ETF application with the SEC following feedback from the agency.

The filing for Fidelity’s Wise Origin Bitcoin Trust, which is intended to be listed on the Chicago options exchange, was found to be ‘inadequate’ due to the omission of declarations relating to the markets in which the Bitcoin ETFs will derive their value.

The SEC called for clarity on a surveillance-sharing agreement with its proposed spot exchange. These types of agreements are intended to help detect, investigate and deter fraud and market manipulation of stocks or shares.

An excerpt confirmed that Coinbase is the intended spot exchange that the Bitcoin ETF would be tied to:

“The Exchange is expecting to enter into a surveillance-sharing agreement with Coinbase, an operator of a United States-based spot trading platform for Bitcoin that represents a substantial portion of US-based and USD-denominated Bitcoin trading.”

CBOE’s filing added that the agreement with Coinbase is expected to carry the ‘hallmarks of a surveillance-sharing agreement’. This will give CBOE supplemental access to Bitcoin trading data on Coinbase.

Bitcoin Futures Lead to Spot Bitcoin ETF

Bernstein’s analysts also highlighted the influence of digital asset management firm’s Grayscale’s attempts to convert its Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund (ETF).

The conversion is currently held up in an appeals court, but the report suggests the provision of futures products for Bitcoin given that the asset is tied to spot exchange rates:

“The court did not sound convinced that the futures price is not derived from the spot price, and thus to allow a futures-based ETF and not allow spot sounds like a difficult pill to swallow for the courts.”

Analysts also said that the lack of a spot Bitcoin ETF has allowed over-the-counter offerings like GBTC to attract investment, disputing them as being more ‘expensive,’ ‘illiquid,’ and ‘inefficient.’

“SEC would rather bring in a regulated bitcoin ETF led by more mainstream Wall Street participants and with surveillance from existing regulated exchanges than deal with a Grayscale OTC product filling the institutional gap.”

The stock exchange also added that Kaiko Research data indicated that Coinbase represented roughly 50% of the US Dollar to Bitcoin daily trading volume in May 2023.

This is a pertinent point given that the SEC had previously raised concerns about the depth of Bitcoin trading markets when it had denied previous filings for similar Bitcoin ETFs over the past few years.

A surveillance-sharing agreement is intended to ensure that exchanges and regulators are able to detect whether a market actor is manipulating the value of stocks or shares.

How Long Will It Take to Issue an ETF?

The SEC has yet to confirm whether it has begun reviewing the most recently filed Bitcoin ETF applications. 

The agency will enter a 45-day review period once it has published the filings in the Federal Register and can extend this period to as long as 240 days. 

The SEC is Suing Coinbase

Coinbase is a central pillar in the Bitcoin ETF filings from both Fidelity and BlackRock. BlackRock intends to use the firm as its BTC custodian, while Fidelity’s Wise Origin Bitcoin Trust’s latest filing lists the U.S. exchange as its surveillance-sharing partner.

The SEC charged Coinbase in June 2023 for allegedly operating as an unregistered securities exchange as well as offering and selling unregistered securities in connection with its staking-as-a-service program.

Despite the litany of charges against the exchange and the ongoing legal battle, cryptocurrency proponents believe that the filing of Bitcoin ETF by major asset managers suggests that there is great confidence that a positive outcome may be reached.

The U.S. Securities and Exchange Commission’s (SEC) stance on spot bitcoin (BTC) exchange-traded-funds (ETF) is a difficult one to hold, and the probability for approval is fairly high, brokerage firm Bernstein said in a research report Monday.

Bernstein notes that the SEC had already allowed futures-based bitcoin ETFs, and recently approved leverage-based futures ETFs on the premise that futures pricing comes from a regulated exchange like the CME.

According to analysts led by Gautam Chhugani, the SEC believes that a spot bitcoin ETF would not be dependable because the “spot exchanges (e.g. Coinbase) are not under its regulation, and thus spot prices are not reliable and prone to manipulation.”

Despite receiving numerous applications, the regulator has yet to approve a spot bitcoin ETF. A unit of Blackrock filed paperwork last month for the formation of a spot Bitcoin ETF. This prompted other asset managers, such as Invesco and Wisdom Tree to apply or reapply for a Bitcoin ETF product.

The report flagged Grayscale’s bid to convert its Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund (ETF), which is currently before an appeals court.

“The court did not sound convinced that the futures price is not derived from the spot price, and thus to allow a futures-based ETF and not allow spot sounds like a difficult pill to swallow for the courts,” the analysts wrote.

Furthermore, the report said the industry has also suggested a surveillance agreement between the spot exchange operator and a regulated exchange such as Nasdaq.

The lack of a bitcoin spot ETF leads to the growth of over-the-counter products like the Grayscale Bitcoin Trust (GBTC), which are more expensive, illiquid and inefficient, the broker said. Grayscale is owned by CoinDesk’s parent company, Digital Currency Group (DCG).

“SEC would rather bring in a regulated bitcoin ETF led by more mainstream Wall Street participants and with surveillance from existing regulated exchanges, than having to deal with a Grayscale OTC product filling the institutional gap,” the report said.

According to analysts led by Gautam Chhugani, the SEC believes that a spot bitcoin ETF would not be dependable because the “spot exchanges (e.g. Coinbase) are not under its regulation, and thus spot prices are not reliable and prone to manipulation.”