This month in crypto: US Bitcoin ETFs banned in the UK

It finally happened.

After 10 years, countless court cases, and a regulator 100% opposed to crypto, America finally got its first spot-price Bitcoin ETF.

Actually, it got 11.

Most of them are already live and within five days two of them – Blackrock’s and Fidelity’s – have more than $1 billion of inflows each:

Grayscale’s ETF hasn’t fared so well, with around $2.2 billion of outflows. The reason for that is likely twofold.

One: it has much higher fees than the others – Grayscale’s ETF charges 1.5%, while Blackrock’s charges just 0.12%.

Two: Grayscale’s ETF has been around for a long time – since 2013 – in a different form. Until last week it was a “trust”, with a $50,000 minimum investment, a one year minimum holding term and a 2% fee.

And it was trading at a big discount to the actual Bitcoin spot price… mostly because no one knew if it would ever turn into a proper ETF.

So a lot of people suddenly made a lot of profit when it turned into an ETF… and they were no longer tied by the one-year holding term. A lot of those people are probably taking some profits now.

Or maybe they’re just taking their money out of the Grayscale ETF and putting it into the Blackrock and/or Fidelity one.

The thing is… it’s likely none of those ETFs would have been approved if it wasn’t for Grayscale’s big win against the Securities and Exchange Commission (SEC) a few months back.

Here’s what I wrote about it at the time:

For a very long time now, Grayscale has held the biggest bitcoin fund in the world, with roughly 623,000 Bitcoin under management, or around 3% of Bitcoin’s circulating supply.

In fact, Grayscale was just revealed as the second largest holder of Bitcoin in the world by Arkham Intelligence.

(And it’s also the second largest holder of Ethereum. More on that in a second.)

Anyway, Grayscale has been trying to turn its trust into a spot Bitcoin ETF for years now. And the SEC has been slapping down every application it makes.

As I (and just about every other crypto publication in the world) have pointed out many times, the SEC’s reasons for refusing Grayscale’s applications don’t make logical sense.

The SEC says it won’t allow Grayscale to convert its trust into a spot Bitcoin ETF because Bitcoin’s price is too open to manipulation.

Yet, the SEC has allowed a large number of Bitcoin Futures ETFs to launch.

Logically, if Bitcoin’s spot price is too open to manipulation then its futures price is as well. Actually, it’s even more open to manipulation.

Everyone knows this, including the SEC – they aren’t dumb. But everyone also knows they can’t do anything about it. What the SEC decrees goes.

Or, at least it did, until Grayscale took them to court… and won.

In fact, the court slapped down the SEC for a change, calling its denial of Grayscale’s application “arbitrary and capricious”.

Here’s what the judge said:

“It is a fundamental principle of administrative law that agencies must treat like cases alike. The Securities and Exchange Commission recently approved the trading of two bitcoin futures funds on national exchanges but denied approval of Grayscale’s bitcoin fund. Petitioning for review of the Commission’s denial order, Grayscale maintains its proposed bitcoin exchange-traded product is materially similar to the bitcoin futures exchange-traded products and should have been approved to trade on NYSE Arca.

“We agree. The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products. We therefore grant Grayscale’s petition and vacate the order.”

If you follow the link above, there’s actually a lot of interesting stuff in the court document.

Here’s a particular highlight (emphasis mine):

“The Commission [the SEC] neither disputed Grayscale’s evidence that the spot and futures markets for bitcoin are 99.9 percent correlated, nor suggested that market inefficiencies or other factors would undermine the correlation.

“The Commission faults Grayscale for failing to provide other types of evidence. Without further explanation, however, the Commission’s assertion that “information in the record for this filing does not support [the] claim” that “any fraud or manipulation in the underlying [spot] market will affect both products in the same way” is unreasonable.

“The Commission’s unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decision making.”

Aww snap!

It is important to note that this doesn’t mean the SEC has to approve the Grayscale spot Bitcoin ETF application. It just has to reconsider it.

Well, a few months later, on the final day of the SEC’s deadline, it did approve Grayscale’s application – along with 10 others.

And it’s likely that court case made all the difference.

None of these other Bitcoin ETFs would be here if it wasn’t for Grayscale’s determination. Oh and the Facebook twins, too. They’re the ones who tried to create the first spot Bitcoin ETF back in 2013, and they’ve been fighting for one ever since.

Gary Gensler’s grudging statement on the approvals makes for interesting reading 

Obviously The SEC’s chair, Gary Gensler, wasn’t happy about the approval. But at this point he couldn’t really not grant it.

Here are some choice words from him on the ETF approvals:

Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing. 

While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto. 

And SEC commissioner, Caroline Crenshaw went even further in her statement of dissent:

I am deeply concerned about today’s actions. I am concerned that these products will flood the markets and land squarely in the retirement accounts of U.S. households who can least afford to lose their savings to the fraud and manipulation that appears prevalent in the spot bitcoin markets and will impact the ETPs. 

I am concerned that today’s actions will create the imprimatur of Commission approval and oversight of the underlying spot markets when really no such oversight exists. I am concerned that there will be confusion about what exactly these products are – (they are not ETFs registered under the Investment Company Act of 1940, the ubiquitous products that today are used by millions saving for retirement) – and that investors may infer protections that do not in fact exist. 

I am concerned about what comes next – when new, potentially more speculative products bearing greater risks of investor harm seek to list, we will hear a chorus of well-heeled voices saying that the SEC’s hands are tied by the new standards that we have set. I fear that today we are setting ourselves up for tomorrow’s failure, and it will be the investors that we have a duty to protect who will ultimately pay the price.

That last paragraph could be quite telling given that both BlackRock and Fidelity filed for spot Ethereum ETFs in November, which I covered here: Ethereum ETFs incoming.

So, what does all this mean? Not a lot if you live in the UK

Many of my readers live in the UK.

And so the big question is… how do these Bitcoin ETF approvals affect UK citizens?

The short answer is, they don’t.

Turns out that although UK citizens can invest in many US-based ETFs, they can’t invest in these Bitcoin ones.

In 2021 the Financial Conduct Authority (FCA) – basically the UK’s SEC, banned the sale of crypto-derivatives, including exchange-traded notes.

So, no Bitcoin ETFs for the UK.

All the government’s promises of making the UK a “crypto hub” are looking kind of empty right now.

Maybe the FCA will update its rules and allow these ETFs in the UK. But that seems very unlikely, given it’s been cracking down on crypto more and more over the last few years.

I mean, that derivatives and exchange-traded note ban only came into effect fairly recently.

And, it seems that even if the ETFs do somehow get through UK regulators, they’ll only be available to institutions and “sophisticated” (very rich, not necessarily very smart) investors.

Here’s an excerpt from a Forbes article quoting a guy from an investment company I used to work for back in the day:

Bestinvest’s Mr Hollands said that for an ETF to be made directly available by a UK-regulated investment platform, under a regulation known as Packaged Retail and Insurance-based Investment Products Regulation, or PRIIPs, fund providers would have to comply with UK regulatory requirements in terms of producing a key information document, which a US-listed ETF wouldn’t have.

He said: “Even were Bitcoin or cryptocurrency ETFs to become authorised in the UK in the near future, it is possible that these would be primarily accessible for professional investors such as discretionary fund managers or those certified as sophisticated investors.

“This is because of the introduction of the FCA’s Consumer Duty principle, which was a major regulatory development in the financial services sector last year. It aims to increase consumer protection for retail investors and ensure regulated firms are focused on good client outcomes.

“As a result, execution-only investing platforms have become more cautious about the access they provide to higher risk or more complex products, rather than relying on the caveat emptor, or ‘buyer beware’, principle which was widely assumed to have prevailed previously.”

I wonder if the government will put any pressure on the FCA to allow these ETFs over here once people in the UK start to realise they will never have access to Bitcoin ETFs under the current rules.

The weird thing is, surely it’s more harmful for consumers to not allow Bitcoin ETFs in the UK.

People can already buy Bitcoin on any number of exchanges – where they have to take responsibility for storing and securing it themselves, which opens them up to scams, theft and loss.

whereas if those same people could just buy into a Bitcoin ETF through their normal broker they wouldn’t have to worry about any of that.

Strange.

Plus, if UK citizens could invest in these Bitcoin ETFs, they could put them into ISAs… and save a potential fortune on capital gains tax.. Ah, maybe that’s the reason why.

Next month’s premium article will be on…

The magic of Automated Market Makers (AMMs), one of THE most important developments in crypto/DeFi ever.

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And I’ll also be delving into the crazy back-stabbing backstory behind two of the biggest ones.

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Thanks for reading. 

Harry

Full disclosure: At time of writing, I held the following cryptos: Ethereum, IOTA, Radix, Mina Protocol, Aleph Zero.

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