SEC Rejected Bitcoin ETFs, BlackRock and Cryptocurrency Whales Impact

Trading News - The recent fluctuations in Bitcoin's value have once again brought the world’s largest cryptocurrency into the limelight. Amid a series of momentous events in the crypto space, the leading digital currency experienced a 3% dip, plummeting below $30,000. However, optimistic Bitcoin whales, unfazed by the momentary slump, have set their eyes on the $35,000 milestone after an impressive 85% gain in the first half of the year.

Notably, the social sentiment surrounding Bitcoin remains somewhat negative following the U.S. Securities and Exchange Commission's (SEC) decision to reject Bitcoin ETF applications from Nasdaq and Cboe Markets due to insufficient documentation. This setback may pose a short-lived challenge given the optimistic outlook expressed by Bloomberg ETF analyst Eric Balchunas, who underscored that these entities can update their applications and refile.

As institutional investors continue to display growing interest in Bitcoin, there are signs of heightened demand for BTC derivatives. A particular group of whale investors, with balances ranging from 1,000 to 10,000 BTC, started purchasing Bitcoin around mid-June. Coincidentally, this buying spree aligns with Blackrock's announcement of its Bitcoin ETF filing with the SEC, a move that saw the whales collectively purchase 60,000 BTC in the latter half of June.

The SEC's rejection of the Bitcoin spot exchange-traded fund applications put forth by Nasdaq and Cboe on behalf of BlackRock and others, such as Fidelity, was due to a perceived lack of clarity. The agency noted that the filings failed to detail the nature of surveillance-sharing agreements—a critical element to assuage the SEC’s concerns over market manipulation.

Despite this news, Bitcoin's price has been performing admirably, with a weeks-long rally elevating the cryptocurrency to its highest price in more than a year. A large part of this optimism emanates from the series of ETF applications from financial heavyweights. In particular, BlackRock’s filing sparked hope that a firm of its stature could be the first to win the federal agency’s approval. By collaborating with Nasdaq on a surveillance-sharing agreement, they could potentially eliminate market manipulation, a repeated concern cited by the SEC in their past denials of Bitcoin spot ETF applications.

However, the SEC has maintained a stringent stance, considering recent applications from asset managers to launch spot Bitcoin ETFs as inadequate. They pointed out that filings from Nasdaq and Cboe on behalf of BlackRock and Fidelity were insufficiently clear and comprehensive. Nonetheless, the exchanges or asset managers were given the opportunity to refile by addressing the regulator’s feedback, a move Cboe acted upon later the same day.

Bitcoin and crypto-related stock prices have seen a significant surge since BlackRock announced its plans for an ETF. Amid the buzz, Bitcoin crossed the $30,000 mark for the first time since April, marking a critical milestone in the cryptocurrency's journey. This has led to a flurry of activity from traditional and crypto asset managers, including Fidelity Investments, Invesco, WisdomTree, Bitwise Asset Management, and Valkyrie, who have either resubmitted or amended their applications for a spot Bitcoin ETF.

The launch of a Bitcoin ETF that accurately tracks the price of the cryptocurrency would represent a landmark moment for the industry, extending access to Bitcoin for a larger number of investors. This would enable investors to trade Bitcoin through a brokerage account as easily as shares of stock, potentially bringing Bitcoin and cryptocurrencies further into the mainstream.

However, the road to a spot Bitcoin ETF is littered with past SEC rejections, primarily on the grounds of susceptibility to fraud and market manipulation. Nevertheless, hope persists among industry insiders that BlackRock, the world's largest money manager, might have the best shot at getting a spot Bitcoin ETF approval. This is largely due to their potential agreement to share "surveillance" of a spot Bitcoin trading platform with Nasdaq, who would list the ETF. Other major players, including Fidelity and Ark, have included similar language about a “surveillance-sharing agreement” with the Cboe in their ETF filings.

The SEC's decision to reject the filings seems largely based on the absence of the spot Bitcoin exchange's name in the “surveillance-sharing agreement," alongside a lack of information about these surveillance arrangements. As a response, Cboe refiled applications for spot Bitcoin ETFs on behalf of Fidelity, WisdomTree, VanEck, Invesco, and Ark Investment Management, indicating plans to enter into surveillance-sharing agreements with Coinbase. Nasdaq, expected to make a similar agreement with Coinbase, has yet to refile an application for BlackRock.

This reapplication sets the regulatory clock back at least seven days, thus prolonging the competitive race to launch the first spot Bitcoin ETF. It initiates a process where the SEC has 15 days to open the filing for public commentary, followed by an extended period of up to 240 days for the SEC to either approve or reject the filing.

The SEC is currently embroiled in a legal feud with Grayscale Investments, a crypto-asset manager that launched a lawsuit against the SEC in June 2022 after it rejected Grayscale's bid to convert their Bitcoin Trust into a spot Bitcoin offering. A verdict in this case is expected in the fall, although a ruling could be delivered sooner.

The chances of a spot Bitcoin ETF approval may also be impacted by Binance’s significant presence in the market for spot and futures trading. John Paul Koning, a financial writer, recently argued that for a U.S. Bitcoin ETF to receive approval, Binance would need to cease operations, and regulated venues would need to take its place. This is due to the fact that only then would a majority of Bitcoin trading migrate to venues that satisfy both the SEC’s 'regulated' and 'significant' requirements.

In another significant development, the SEC sued Binance, the world’s largest cryptocurrency exchange, in early June, alleging that the overseas company operated an illegal trading platform in the U.S and misused customers’ funds. The federal agency also sued Coinbase for allegedly violating rules that require it to register as an exchange and be overseen by the SEC.

The news of the SEC considering recent filings to launch a spot Bitcoin ETF inadequate sent the price of Bitcoin plunging by $1,000, or over 3%, in a matter of minutes. The SEC had reportedly informed Nasdaq and CBOE – the exchanges that filed the spot ETF paperwork for several of the asset managers, including BlackRock and Fidelity – that the applications weren’t sufficiently clear and comprehensive.

Despite these setbacks and regulatory challenges, Bitcoin's resilience and the relentless pursuit of industry giants to navigate the complex regulatory terrain illustrate a hopeful future for cryptocurrencies and their integration into mainstream financial systems.
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