SEC holds calls with spot bitcoin ETF hopefuls as possible approval nears

The Securities and Exchange Commission is wasting no time preparing the financial industry for possibly the biggest regulatory event in the history of the $1.6 trillion crypto market: The potential approval of a "spot" bitcoin ETF in the new year.

SEC staffers held separate telephone conference calls with spot bitcoin ETF hopefuls on Thursday afternoon, FOX Business has learned. The calls involved some minutiae on the application process, but also delivered a definitive message on how the ETFs need to be structured. The agency staffers said the SEC will only consider applications that structure an ETF that allows issuers to only buy the product using cash instead of so-called "in kind" purchases using bitcoin. Similarly, redemptions of the ETF must be provided only in cash.

Any mention of in-kind purchases or redemptions must be stricken from the application, SEC staffers said, FOX Business has learned.

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The cash-only structure is key for the SEC and has been controversial for the money managers seeking approval. Most other ETFs allow both in-kind purchases and redemptions as well as cash. But the SEC believes that bitcoin ETFs present additional regulatory challenges not found in such plain vanilla offerings. It’s demanding cash only because it’s worried about possible malfeasance involved in using crypto for purchases and redemptions. Additionally, the agency doesn’t currently allow broker-dealers to trade spot bitcoin directly like it does other commodities.

At least two money managers are seeking SEC approval for the product: BlackRock, the world's largest money manager, and crypto asset manager Grayscale have been hesitant to give up the fight for in-kind creations, arguing that the process is more efficient and will result in a more robust trading market.

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FOX Business was first to report about the SEC's outreach. It is unclear whether the SEC called all prospective issuers of the spot bitcoin ETF, but FOX Business confirmed that calls were held with BlackRock, Valkyrie, Grayscale, Ark 21Shares and Bitwise. Also called by the SEC were the exchanges where the respective issuers plan to issue their ETFs, the Nasdaq and CBOE stock markets.

The SEC declined comment.

News of the calls has fueled speculation among some industry participants that the agency could be gearing up to approve applications before the end of the year, instead of January. However, the SEC is a government agency, and many staffers will be off over the Christmas period. Additionally, FOX Business has learned that the SEC asked issuers to submit amended filings by December 29. 

"It is apparent from all the subsequent S-1 filings that the commission directed the change to cash creates, seemingly as a final hurdle before passage," said CoinRoutes co-CEO David Weisberger, "While timing is not certain, it seems likely to happen before the next deadline on January 10."

The price of bitcoin has spiked 64% over the past three months for a number of reasons, including anticipation that SEC approval of the spot bitcoin ETF will mainstream the crypto business. The SEC could reject the applications, of course, given Chairman Gary Gensler's long-held criticism of the digital coin market as the "wild west" of investing and rife with fraud, typified by the collapse of the FTX crypto exchange and the conviction of its founder, Sam Bankman-Fried.

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Still, based on conversations with the SEC staff, asset managers remain confident that a favorable decision from the SEC will be made on or before Jan. 10, as FOX Business first reported Wednesday. That is the deadline for the commission to rule on the first spot bitcoin ETF application from Cathie Wood’s Ark 21Shares.