BlackRock's Bitcoin ETF: A Rescuer or Predator for the Encryption Industry

Author: Mary Liu

The encryption industry is going through the most difficult period of regulation so far. BlackRock, the world's largest asset management company, may become a "relief pill" for the industry and bring windfalls to some participants. Matt Hougan, chief investment officer of Bitwise Asset Management, tweeted: "The future of cryptocurrency is more BlackRock than Binance."

BlackRock's new initiative

The U.S. Securities and Exchange Commission (SEC) has rejected all previously received spot bitcoin ETF applications. Includes applications from Fidelity, CBOE Global Markets and NYDIG. Most recently, it defended itself in a lawsuit brought by Grayscale Investments, which operates the $17.5 billion Grayscale Bitcoin Trust (GBTC) and has been seeking to convert it into an ETF.

GBTC has traded at a consistently large negative premium to the value of the bitcoin it holds — an average of about 40% this year. The conversion will enable traders to arbitrage, unlocking billions of dollars in value.

Since BlackRock's filing, GBTC's negative premium has narrowed, from around 44% in the middle of last week to around 34% currently, suggesting investors see a greater likelihood of a successful ETF switch. Bitwise Asset Management and WisdomTree also followed suit and submitted similar applications again.

Getting the SEC to change its mind won't be easy, but there are reasons for optimism. At first glance, BlackRock's proposal is broadly similar to other previous proposals, namely the creation of a trust that owns bitcoin and can create and redeem shares in exchange for bitcoin, in the same way that these bitcoin ETFs work with physical commodity ETFs such as gold. Roughly similar.

But BlackRock's filing is at least one positive, and on page 36 of its 19b-4 filing, the company says it will introduce a link between Nasdaq (NDAQ) and bitcoin spot trading platforms to mitigate market manipulation. The operator signs a supervision sharing agreement. The monitoring sharing protocol allows sharing information about market trading activities, liquidation activities, and customer identities. In other words, exchanges can obtain confidential information about buyers, sellers, and prices, and the possibility of market manipulation is almost reduced to zero.

Graeme Moore, head of tokenization at the Polymesh Association, said BlackRock’s proposed surveillance sharing protocol, dubbed the “Spot BTC SSA,” makes the application unique and highly likely to pass.

Potential manipulation of spot bitcoin prices is a big reason the SEC has rejected bitcoin ETF applications so far. If that monitoring sharing platform is Coinbase, that could be significant, as Coinbase is one of the exchanges that hosts the CME CF Bitcoin reference rate, which BlackRock's ETF will use.

Will BlackRock's filing be enough to convince the SEC to make a different decision? Excluding the issue of futures and spot goods, how regulators judge the “larger scale” of the market participating in the supervision, or whether it is a fully “regulated market” is still an unresolved issue.

It may be reckless to bet on the approval of BlackRock's spot bitcoin ETF, but if it does, it will have a huge impact on the struggling crypto industry.

Once BlackRock's spot ETF breaks through, other ETFs can use the same mechanism. If an exchange successfully applies to list a spot bitcoin ETF, the process often becomes simpler for other exchanges. Grayscale may lose some market share, but benefits from a head start. More immediately, though, GBTC holders will benefit from the negative premium ending, and a broader user base may also generally drive up the price of Bitcoin.

Another winner could be Coinbase. On the one hand, easy-to-trade spot ETFs could capture some market share among individual investors who might otherwise sign up to trade cryptocurrencies on their platforms. Coinbase, on the other hand, is also the Bitcoin custodian for the BlackRock Proposed Trust and the Grayscale Trust, and earns fees as a result - a more consistent source of income than volume-based fees, and the institutional business is also expected to be the one trading around spot ETFs Market maker hub.

**Traditional institutions "grabbing food"? **

While the entry of large-scale, heavily regulated traditional institutions into crypto may seem like good news, not everyone is optimistic about it. Concerns about "hostile takeovers," the handing over of keys (whether token or encrypted) to institutions, are rife in the community.

Xapo, the institutional-scale cryptocurrency custody tool acquired by Coinbase in 2019, could become a regulatory "white glove," according to Mark Yusko, founder of Morgan Creek Capital Management. He tweeted: "What if BlackRock could take over Xapo? Regulators could shut down Coinbase, SEC label 'unlicensed casino' and hand over the Xapo division if they had most of the funds To BlackRock".

There are also some views that it is no coincidence that large financial institutions collectively deploy encryption businesses. Caitlin Long, a Wall Street veteran and CEO of digital asset bank Custodia Bank, wrote: “Suddenly, these big Wall Street firms are entering the crypto space after the runway has been cleared, and it is difficult not to draw people into associations.”

Long cited this month's SEC's prosecution of Coinbase as a prime example of an enforcement action that he suspects could clear the way for the launch of new exchange EDX.

Investor Adam Cochran commented in a tweet: "BlackRock, Citadel, Deutsche Bank, and Nasdaq are all starting to enter the cryptocurrency space. They bully participants so that they can grab cheap tokens. The trajectory of development has never been clearer." Regulators, he said, favored established firms entering the cryptocurrency space rather than accepting firms focused on digital assets from the start.

The Twitter account @The Wolf Of All Streets with 90W+ fans said: "They are not trying to destroy cryptocurrency. They just want to destroy the current cryptocurrency industry and then hand it over to their cronies. Citadel, BlackRock, Morgan Chase...".

Notably, the SEC has yet to provide any official timeline for approving the BlackRock Bitcoin ETF or any of the other pending ETF proposals. Its approval process is not entirely transparent, and it can take months or even years if a proposal is approved. Sumit Roy, a senior analyst at ETF.com, said in his blog post that Coinbase is being sued, and the SEC and Grayscale's trial date is approaching. Even if BlackRock hopes to obtain inside information, the entire process will be quite complicated.

Can BlackRock Finally Bring Bitcoin A Massive Adoption Wave? In the current regulatory fog, it is difficult for us to predict, but for now, this Wall Street giant undoubtedly has the best chance of winning.