Bitcoin ETF Decision Looms: Industry Awaits SEC Verdict Amid Binance's Settlement

The cryptocurrency market is closely monitoring the ongoing discussions between major asset managers and the U.S. Securities and Exchange Commission (SEC) regarding the establishment of spot Bitcoin exchange-traded funds (ETFs). A key focus is on the redemption methods for these ETFs.

Firms such as BlackRock, along with their exchange partner Nasdaq, are pushing for “in-kind” redemptions, where Bitcoin is transferred directly to investors in exchange for ETF shares. This approach is favored for its potential tax efficiency, as it could circumvent the need to sell securities and possibly trigger capital gains taxes.

According to James Seyffart, Bloomberg Intelligence ETF analyst, the importance of this choice is “In-kind redemptions are the cleanest structure for issuers and investors.” Another Bloomberg analyst Eric Balchunas further noted that from the SEC’s perspective, “cash creates” are preferable as they alleviate the need for U.S. broker-dealers to deal directly with Bitcoin.

Quick clarification here: my point on cash creates was that I could see the SEC's POV for wanting it but from investor's POV in-kind arguably better in terms of the spread and taxation. So poss we see some issuers push for in-kind (perhaps successfully) in engagement w/ Staff.
— Eric Balchunas (@EricBalchunas) November 17, 2023

This debate gains additional context following Binance’s $4.3 billion settlement with the United States. The settlement, addressing allegations of breaking sanctions and money-transmitting laws, includes up to five years of compliance monitoring by the Justice Department and Treasury. This has led some industry observers to view it as a pivotal step in clearing the way for the approval of spot Bitcoin ETFs, as it addresses regulatory concerns that could influence the SEC’s decision-making.

Travis Kling, Chief Investment Officer at Ikigai Asset Management, weighed in on the Binance settlement’s potential impact on the ETF approval process. He emphasized the improbability of ETF approval given Binance’s market dominance, stating there is “no chance” under current conditions. Kling’s viewpoint highlighted the industry’s concerns regarding market manipulation, an issue previously noted by the SEC when denying spot Bitcoin ETFs.

Additionally, other major asset managers, including Grayscale, Fidelity, WisdomTree, Invesco Galaxy, Valkyrie, VanEck, and Bitwise, are also awaiting the SEC’s approval for their spot Bitcoin funds. The general sentiment among industry leaders, like Mike Novogratz, CEO of Galaxy Digital, is optimistic, with Novogratz calling the Binance settlement “super bullish” for the cryptocurrency industry.

As the January 10, 2024, deadline approaches for the SEC’s decision on Ark/21Shares’ first spot Bitcoin ETF, optimism within the industry is high. Bloomberg Intelligence analysts assert that the odds of approval stand at 90%. They noted that the ongoing progress is a “good sign,” indicating the SEC has found a “path forward in the plumbing” that aligns with their regulatory comfort.