What’s the difference? Spot prices are how derivative traders in the options and futures markets refer to asset prices for immediate delivery rather than future delivery. In simpler terms, the spot price is the current price of a commodity at the present moment, rather than guesses at what the price might be later.
Spot prices are used as benchmarks for pricing derivative contracts. For instance, the spot price of a currency pair, such as the exchange rate between the U.S. dollar and the euro, is a reference point for currency hedging.
BlackRock Aims To Address the SEC’s Fears
What’s different this time? BlackRock is proposing a fund that would follow rules specifically addressing concerns the SEC has cited in rejecting others’ past applications, say experts.
It would close loopholes like an absence of a mechanism for ensuring that customer assets cannot be diverted by the exchange to an unauthorized party.
“That was one of the problems with the FTX crypto exchange,” says Eberle.
After FTX’s spectacular failure in late 2022, founder Sam Bankman-Fried was indicted for multiple counts of fraud and conspiracy to commit money laundering. He’s alleged to have improperly moved customer funds to his separate trading firm, Alameda Research, where he allegedly co-mingled the money and spent it as if it were his own.
“It looks like BlackRock studied the SEC’s lawsuits against Binance and Coinbase Global,” says Eberle. “Then its own application described how it would avoid problems the SEC had described.”
The SEC filed lawsuits against Coinbase Global and Binance just days before BlackRock’s filing. Coinbase and Binance are the two largest crypto exchanges in the world by market cap. The SEC alleges that Binance and its founder violated securities laws by allowing U.S. customers to trade on Binance.com despite the SEC’s ban on such trading.
Building a Bitcoin ETF Ecosystem
Less than two weeks after BlackRock’s filing, rival asset management giant Fidelity refiled paperwork for its Wise Origin Bitcoin Trust, also a spot bitcoin ETF. Originally filed in 2021, that bid was rejected by the SEC in 2022.
Undaunted, Invesco and WisdomTree both reapplied in the wake of BlackRock’s effort as well.
Crucially, these other crypto industry players have also proposed solutions to the SEC’s concerns.
Momentum Building?
Technically, the new filing was submitted to the SEC by the CBOE-BZX Exchange filed for a proposed new listing rule for Fidelity’s bitcoin ETF. The new filing formalizes Fidelity’s application with the SEC.
The CBOE-BZX Exchange has made similar recent filings for other firms.
One of the SEC’s key concerns about a spot bitcoin ETF is the potential for market manipulation. The BlackRock filing proposes a surveillance-sharing agreement that could minimize that risk. The newer filings include similar proposals.
Other firms are proposing similar steps to address the SEC’s concerns, Eberle says.
“It is extremely coincidental that all of the proposals took place within a few weeks of the SEC lawsuits against Coinbase and Binance,” says Eberle. “Those en ies, especially EDX and BlackRock, are proposing solutions that satisfy the concerns that the SEC has mentioned.”
BlackRock Has Plenty of Company
The new proposals, per a report by Eberle’s Castle Analytics, are:
EDX Markets has launched an ins utional execution-only trading venue with the backing of Citadel Group, Charles Schwab and Fidelity Digital Assets.
EDX has also announced plans to launch a clearing firm, EDX Clearing, later in 2023.
Deutsche Bank says it intends “to offer digital asset custody services to its ins utional clients.”
Those steps could avoid the market manipulation and the potential for fraud that the SEC has cited in its opposition to prior proposals for Bitcoin ETFs and for spot-price crypto exchanges. If these sticking points can be removed, it’s likely the SEC might find room to approve BlackRock’s proposal.
For example, EDX’s new exchange for ins utional customers would separate broker-dealer activities from each other and from the exchange itself. “It would assure that the exchange is neutral and not pocketing customers’ money,” Eberle said, the way FTX is alleged to have done. “It would assure that broker-dealers hold client assets in segregated accounts. And it would assure that broker-dealers don’t collude with each other.”
EDX’s proposed clearing firm, EDX Clearing, would segregate trading from settlement. “It would provide a mechanism for making sure that both sides of any trade really exist,” Eberle said. It would create a neutral third party that guarantees traders that money to buy assets such as Bitcoin and the assets themselves actually exist.
Deutsche Bank’s proposal would serve the European cryptocurrency market, and that would help U.S. traders by enlarging the overall global market for crypto and enhancing liquidity and demand.
BlackRock Is Avoiding Grayscale’s Mistakes
Bitcoin traders need to digest some of the fine print in BlackRock’s filing before popping open the champagne, however. The most notable is that BlackRock is seeking permission to run a trust, not an ETF.
Although many in the crypto community believe BlackRock’s spot Bitcoin trust will be a de facto Bitcoin ETF, there are significant differences between the two options.
Grayscale Bitcoin Trust (GBTC), a popular investment vehicle that invests in Bitcoin, also operates as a trust rather than as an ETF.
A drawback to GBTC is that—like many investment trusts—it often trades at a discount to the market value of its underlying asset, Bitcoin. Its discount was around 50% late last year. In the wake of the BlackRock filing, that discount narrowed to about 33%.
GBTC trades at a discount partly because investors are allowed to sell their shares in the market, but they have no way to redeem their holdings in exchange for the Bitcoin in the trust. And unlike an ETF, GBTC has no redemption mechanism. Much like any investment trust, GBTC shares can’t be created and destroyed as demand shifts. That limits the number of available shares. At the same time, GBTC charges shareholders a 2% fee or expense ratio.
Would the same problem dog investors in BlackRock’s proposed trust? Eberle believes BlackRock “has probably already spoken with market makers” to create the arbitrage opportunity for a secondary market in the BlackRock trust’s shares. That could avoid price discounts and premiums, Eberle says, which is how BlackRock’s trust could act as an ETF and avoid the kind of price distortions hounding Grayscale’s trust.
BlackRock said it could not comment “due to regulatory filing restrictions.”
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