Nasdaq’s Giang Bui, who heads U.S. Equities & Exchange-Traded Products, explains how Bitcoin ETFs are made. She shares insights about the SEC’s activities and how Nasdaq competes in the Bitcoin ETF market.
Different Ways that an ETF can Come to Market
Most Exchange-Traded Funds (ETFs) follow specific regulations, mainly in the Investment Company Act 1940. However, when it comes to Bitcoin, there’s a bit of a twist in the rules.
There are two types of bitcoin-related products: futures-based and commodity-based. Bitcoin futures-based products, like some ETFs, are guided by the 40 Act. In contrast, those linked to the actual commodity, like spot Bitcoin, operate under the 33 Act, which connects to the Securities Act of 1933.
Here’s where it gets interesting. Creating and managing commodity-based products, including spot Bitcoin ETFs, involves a more detailed process. This process includes filing intricate rules and gaining approval, making it more complicated than the usual 40 Act-based products.
However, the SEC (Securities and Exchange Commission) has made things smoother for 40 Act-based ETFs. They’ve introduced new rules that speed up the process, making it easier for these ETFs to enter the market. These ETFs also have some advantages when it comes to listing on exchanges. They can do so more effortlessly without needing the SEC’s approval, saving time and resources.
But remember, spot Bitcoin falls into the category of commodity-based spot ETFs, which follow different procedures due to their connection to the 33 Act.
What is an Example of One of these Traditional ETFs?
Let’s talk about different kinds of Exchange-Traded Funds (ETFs). The typical ETFs, like the iShares 20 Plus Year Treasury Bond ETF (TLT), follow the 40 Act. That’s just a set of rules that these ETFs have to follow. Now, there’s another type of ETF linked to things like gold. These are different, like the SPDR Gold Shares (GLD) or iShares Gold Trust (IAU). They don’t follow the 40 Act but fall under the 33 Act. This is because they’re based on actual commodities, like gold.
So, in a nutshell, standard ETFs have one set of rules (the 40 Act), while commodity-based ones, like those dealing with gold, have different rules (the 33 Act).
Generic Rule for 33 Act Products
Let’s dive into the world of ETF and Bitcoin ETF rules. Making rules that fit many things can be a slow process. The first ETF came out in 1992, but it wasn’t until 2019 that we got these general rules for ETFs following the 40 Act.
Now, when it comes to spot commodity products, there aren’t as many that hit the market. But when they do, it’s not a quick process. The SEC, which keeps an eye on these things, takes its time. They don’t want to treat everything the same because commodities like gold, silver, palladium, and now Bitcoin are all different. So, there’s no one-size-fits-all rulebook for these commodities; each has its own rules and considerations. That’s why the SEC takes time to ensure everything’s in order.
Approval process for a commodity ETF
Let’s break down how things work when dealing with commodities like Bitcoin. The process is quite similar, whether it’s Bitcoin EFT or something else.
Here’s how it goes: The issuer, like BlackRock, has to do some paperwork. They fill out a Form S-1, like a registration form, and send it to the SEC. They also mention which exchange they want to use. If it’s Nasdaq, for example, they tell the SEC by filing a Form 19-b4. This form asks for changes to our rules to allow this commodity product to be listed and traded on our platform.
So, whether it’s Bitcoin or any other commodity, there’s a consistent process to ensure everything is legit and follows the rules. The only things that might differ are how they talk about the product and how they prevent fraud and manipulation, but the overall process remains the same.
The Next Steps After Filing a 19-b4
The SEC handles different types of filings through its various divisions. When a company submits the S-1 form for a product, it falls under the scrutiny of the SEC Division of Corporate Finance, which evaluates the product’s details. On the other hand, the 19-b4 form, which deals with trading aspects of a commodity product, is reviewed by the SEC Division of Trading and Markets. For 40 Act products, a distinct form, N-1a, is used for registration, and the SEC Division of Investment Management assesses it. Each division ensures that the respective filings comply with the appropriate regulations and requirements.
Analysis of the BlackRock ETF Application Rejection on Nasdaq
The news we’re discussing here is connected to “19-b4.” There’s a specific timeline when an exchange like Nasdaq submits this to the SEC. The SEC has seven business days to review it and decide if it follows their rules for this form. If it doesn’t meet those rules, they might reject it, but this rejection is more about following the proper steps than saying whether the product itself is good or bad. It’s like ensuring all the paperwork is in order before moving forward.
The Significance of Listing Coinbase as a Surveillance Sharing Partner in ETF Applications
What happened here is a bit unusual in the world of filings. Normally, we have agreements to share information with other exchanges. But in this case, it was different. We made a unique move by listing Coinbase as a partner for sharing surveillance data in our filing. We did this to make our application as strong as possible, even though it’s not typically done in these filings.
Understanding SEC’s Rejections of Spot Bitcoin ETFs and Their Surveillance-Sharing Requirements
In the past, when the SEC didn’t approve certain 19-b4 filings, they mentioned that the exchanges didn’t prove they could prevent fraud and manipulation effectively. Now, the SEC thinks that for a Bitcoin ETF to be secure, the exchange listing must show a solid agreement with a big, regulated market connected to the asset the ETF is based on.
Here’s why: If someone wants to trick or manipulate the ETF, they would probably need to do some trading in this significant market, too. So, agreeing to share information with this market helps spot and stop any bad behavior involving the ETF. Essentially, the SEC wants to see that the exchange has a good plan to keep the ETF safe from harm.
SEC’s Perspective on Determining a Market of Significant Size
In our 19-b4 filing, we said that we think Coinbase is a big part of bitcoin trading in the U.S. We even described it as the operator of the biggest U.S. spot bitcoin trading platform, and it handles most of the global trading in spot bitcoin when it’s paired with U.S. dollars (USD). So, we basically told the SEC that Coinbase plays a significant role in this market.
Grayscale’s Recent Legal Victory Over SEC: Converting GBTC into an ETF
A court in D.C. called the D.C. Court of Appeals, recently made a decision that’s a big deal for Grayscale. It’s like a significant step toward launching a spot Bitcoin ETF. So, the SEC, the authority overseeing these things, has to look at why they said “no” to Grayscale’s request to turn their Bitcoin trust into an ETF.
Now, we’re keeping a close eye on this court ruling. We’re studying what it means for our filings and the ETF timeline. But right now, we can’t say much more about what it means because we’re still figuring things out.
The Race for the First Spot Bitcoin ETF: A Unique Situation
In the world of ETFs, it’s a real competition. Everyone is trying to come up with the best ideas; sometimes, different companies might have similar product ideas. When that happens, the big question is: How can we be the first to bring it to the market? Being the first can make a huge difference.
So, we’ve worked closely with the people who want to create these ETFs, our own teams that handle operations and legal matters, and all the different folks involved in making these products. We’re ensuring we’re fully prepared so that as soon as we get the green light, we can launch the ETF quickly. Being ready to go right away is essential in this competitive business.
Coexistence of Spot ETFs and Futures Products in Today’s Market
You see, futures are a bit tricky because they’re based on what we think the value will be in the future. This can lead to “contango,” which might affect how well the fund performs. So, sometimes, futures can move away from the actual spot price of the commodity. Managing futures can also be more complicated, needing more trading effort than dealing with the spot version.
Now, when we have a commodity ETF, like one for gold, we often see that the spot version, which deals with the real commodity, tends to attract more investors. People seem to like it better.
But a spot ETF offers a choice. It’s another way for investors to get into something like Bitcoin EFT without going through all the hassle of signing up on different cryptocurrency platforms and figuring out how to keep everything safe. Plus, you can use an ETF for trading and as a protection for your investments.
The significant advantage is that ETFs like these are regulated by the SEC and trade on regulated exchanges. That means there’s extra protection for investors. So, the ETF is like a different option, giving investors more choices and access to the market. That’s what the companies creating these ETFs want to offer to people.
Future Considerations for Pending Bitcoin ETF Applications
In this process, we keep an eye on specific milestones. For example, mid-January is a date marking the 240th day since the Ark 21 shares filing. Our 240th day falls in mid-March. These milestones are important because they serve as markers for the SEC to take some action on these filings. It’s like a way of keeping track of progress in the application process.
