Analysts at JPMorgan believe it is becoming increasingly likely that the Securities and Exchange Commission (SEC) will be compelled to promptly approve applications for exchange-traded spot Bitcoin funds (BTC) from several asset management firms.
JPMorgan, a leading financial institution, emphasized this potential outcome in a report published on Friday, which sheds light on the implications of a federal court ruling regarding Grayscale's application to convert the Grayscale Bitcoin Trust (GBTC) into an ETF.
In recent weeks, there has been a wave of applications for spot Bitcoin ETFs in the United States, a market segment that the SEC has historically approached with skepticism. Previous attempts to introduce such products to the market were rejected by regulatory authorities, often due to concerns about potential market manipulation. However, in 2023, a glimmer of optimism has emerged, driven by the submission of an application by Wall Street heavyweight BlackRock Inc. BlackRock's track record in navigating the ETF landscape has instilled confidence in the market, suggesting that regulatory approval may be attainable this time around.
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The crux of the matter lies in a crucial finding by the court in the Grayscale versus SEC case. The court opined that the SEC's rejection of Grayscale's initiative was "capricious and arbitrary" as the regulatory authority had not provided a conclusive rationale for the differential treatment of equivalent products. In particular, the court highlighted the SEC's divergent approach to futures-based Bitcoin ETFs. According to the analyst team led by Nikolaos Panigirtzoglou, the judgment emphasized that the interconnection of the Bitcoin spot market with the CME Bitcoin futures market weakens the distinction between fraud and manipulation risks in both sectors.
"The postponement of the decision likely suggests that multiple applications for Bitcoin spot ETFs will be approved simultaneously, rather than granting a first-mover advantage to a single applicant." - Nikolaos Panigirtzoglou, JPMorgan Analyst
JPMorgan's analysis posits that the court's finding, which asserts there is no justification for favoring futures-based Bitcoin ETFs over spot ETFs, has significant ramifications. This conclusion essentially questions the SEC's stance on this matter and necessitates a review of prior approvals for futures-based ETFs. To justify its rejection of Grayscale's GBTC conversion request, the SEC would be compelled to retroactively withdraw its approval for futures-based Bitcoin ETFs. JPMorgan is of the opinion that such a retrospective revocation, if carried out, could prove highly disruptive and embarrassing for the regulatory authority. Therefore, the bank is skeptical about whether the SEC will pursue this course of action.
JPMorgan tempers enthusiasm
Anticipation is growing for the possibility of a U.S.-approved exchange-traded fund (ETF) directly investing in Bitcoin. One of JPMorgan's strategists, Nikolaos Panigirtzoglou, offers a nuanced perspective on the potential impacts these events could have on cryptocurrency markets. While the Grayscale court ruling potentially paves the way for eventual approval of spot Bitcoin ETFs, he emphasizes that the impact of this approval on the cryptocurrency market may be weaker than expected.
His report notes that spot-based ETFs have existed outside U.S. borders for some time but have struggled to generate significant investor interest. This trend also extends to the broader landscape of Bitcoin funds, which includes both futures-based and physically backed funds that have seen limited investor interest since the second quarter of 2021.
Spot-based ETFs have the appeal of allowing investors to hold positions indefinitely while avoiding the rollover costs associated with futures ETFs. The cryptocurrency sector believes that the potential debut of spot-based ETFs could mark a turning point, ushering in a influx of mainstream capital into the market.