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Friday, June 30, 2023

SEC Questions BlackRock's Spot ETP App

News summary by MFWire's editors

Maybe the team at BlackRock [profile] did not know anything special about the SEC's willingness to greenlight spot cryptocurrency ETPs after all. The Wall Street Journal reported Friday that the Securities and Exchange Commission (SEC) staff think that recent spot Bitcoin ETF filings are inadequate and "not sufficiently clear and comprehensive." The report is based on "people familiar with the matter."

Laurence D. "Larry" Fink
Chairman, CEO
The SEC staff informed the Nasdaq and Cboe of the regulatory agency's concerns, according to the report. The exchanges file the paperwork with the SEC. The SEC's specific issue appears to be that the applications failed to provide enough details of how the proposed surveillance-sharing agreement would work. One simple omission in the filings noted by the SEC is the name of the spot exchange that is part of the agreement.

While the asset managers can update their filings — and they likely will — the SEC staff's concerns about the details of the surveillance-sharing agreement hints that BlackRock executives had no special knowledge when the created their filing (which was submitted on June 15, as previously reported).

The report of the SEC staff's concerns comes a day after Fidelity Investments joined a wave of asset managers to file for Bitcoin ETPs. BlackRock kicked off this month's filing wave that now also includes requests from Invesco, WisdomTree, Bitwise, Valkrie, and Ark.

The SEC has never approved a spot ETP that invests in a crypto asset since the first application was made in 2017. However, Grayscale is currently suing the SEC over the commission's rejection of the conversion of its Bitcoin Trust to an ETP structure. A ruling in that case is expected in the coming months. One reason for the spate of filings may be an attempt by asset managers to be early in line for SEC approval if Grayscale wins its case.

There is also speculation that BlackRock "broke the code" when it included a new surveillance-sharing agreement that could resolve the stated SEC staff concerns that crypto assets are not quoted on SEC-approved exchanges. The lack of pricing transparency has led to concerns over price manipulation.

To be approved, an ETP needs to gain a majority of the votes by the five-member SEC. Recently applications have failed by 3-2 votes, with commissioners Hester Peirce and Mark Uyeda providing the two yes votes. There is some speculation that Caroline Crenshaw may now be more willing to vote in favor of a spot Bitcoin ETF. Some also think that Chair Gary Gensler may reverse his vote in the case that Grayscale defeats the SEC in court.

Peirce and Uyeda wrote a dissenting opinion, after the commission rejected Van Eck's Bitcoin Trust application in March, that outlined the key issue:
It is true that when approving other types of commodity-based ETPs, the exchange listing such products has had a surveillance-sharing agreement with a market on which futures of the commodity underlying the ETP trade. And those orders typically describe the relevant futures market as "significant." But it is also clear that the Commission is using a uniquely burdensome definition of "significant" in its analyses of spot bitcoin ETP filings.
Editor's Note: A prior version of this story was originally published on our sister publication CeFiWire. 

Edited by: Sean Hanna, Editor in Chief

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