The U.S. Securities and Exchange Commission (SEC) keeps pumping the brakes on exchange traded funds (ETFs) based on BTC spot trades, spoiling the Coinbase (NASDAQ: COIN) digital asset exchange’s hopes of reversing its downward spiral.
On Friday (30), the Wall Street Journal reported that the SEC believes the flurry of ETF applications it has received in recent weeks are “inadequate” and thus not likely to receive the regulator’s stamp of approval. The WSJ quoted sources saying the SEC maintains that the applications “aren’t sufficiently clear and comprehensive.”
The BlackRock investment giant filed its BTC ETF application last month, a move that was swiftly followed by Fidelity Investments. Numerous other firms, including Cathie Wood’s Ark Investment Management, promptly revised and resubmitted their previously rejected spot ETF applications.
The SEC rejected these prior efforts in part based on the flagrant wash trading of BTC that occurs on digital asset exchanges, which leave a spot-based ETF highly vulnerable to manipulation. The fact that the majority of all BTC spot trades now occur on the criminal entity known as Binance—and the overwhelming majority of these trades are made with either Tether or Justin Sun’s TUSD stablecoin, both of which feature reserve assets that are suspected of being vaporware—doesn’t give the SEC confidence that this situation has improved.
BlackRock thought it had untied this Gordian knot by proposing a “surveillance-sharing agreement” whereby the Nasdaq exchange—on which the spot-based ETF was to list—would be provided with real-time data from the platform on which BTC trades would occur.
But the SEC reportedly viewed this move as insufficient, in part because BlackRock didn’t specify the digital asset exchange that would be conducting this surveillance. The Nasdaq-listed CoinBase, which BlackRock intends to use to custody the BTC tokens on which its ETF will be based, was officially named the surveillance partner of several ETFs in late Friday re-filings of applications. Considering the SEC is suing Coinbase, this could prove hella awkward.
BTC maximalists have been salivating at the prospects of a regulator-approved spot-based ETF for years, based on their belief that retail investors who view ‘crypto’ exchanges as rigged casinos run by thieves and scammers would be more likely to take the plunge if they could do so via mainstream brokers.
ETFs based on BTC futures have existed for years, most infamously the Grayscale Investments’ GBTC Trust. But that product’s infamous habit of trading well below the net asset value of its over 600,000 BTC tokens while refusing to let investors cash out while charging those investors excessively high annual fees has taken a lot of shine off the futures ETF sector.
Coinbase optimism misguided
Coinbase’s share price took a major dip in early June following the SEC’s civil suit accusing the exchange of listing unregistered securities and combining the activities of an exchange, broker and clearing agency. But the BlackRock news lit a fire under Coinbase shares, which soared as high as $75 after languishing in the mid-$50 range for most of this year.
Coinbase shares took a hit Friday from the WSJ report but staged a minor rally to close down only 1.2% by end of trading. Sentiment wasn’t helped by a new report from Berenberg analysts that put a target price of just $39 on the stock, based on skepticism that a BTC ETF would fix all of Coinbase’s monetary woes.
Berenberg warned investors that the SEC’s suit against Coinbase—and related actions simultaneously filed by 10 state securities regulators—could result in orders to halt Coinbase’s lucrative staking program. The resulting loss of staking revenue would far outstrip any gains made from the BlackRock custody arrangement.
Coinbase’s staking program involves the USDC stablecoin, on which Coinbase has partnered with Circle. While USDC escaped mention in the SEC’s civil suit, the possibility that it could later be lumped in with the other unregistered securities the SEC has charged Coinbase with unlawfully listing is yet another issue that investors are forced to contemplate.
There’s also the distinct possibility that the SEC might declare that BTC is also a security, based on the centralized control exerted over the token by the BTC Core developers, as well as the fact that Core’s imposition of the controversial SegWit update effectively created an entirely new token that was then airdropped to users of the forked chain. Which would poke a mighty big hole in everyone’s ETF fantasies.
You’re not the boss of me (or anything, apparently)
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