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Key Players (Including SEC) Make Preparations For Spot Bitcoin ETF

The SEC, asset firms and the big U.S. banks have spent the week putting the final touches to the long-awaited approval of spot bitcoin ETFs.

The approval of a spot bitcoin exchange-traded fund (ETF) feels closer than ever, as the January 10 deadline for the U.S. Securities and Exchange Commission (SEC) to rule on proposals from Ark Invest and 21Shares draws near.

While the results of a survey conducted by Bitwise showed that only 39% of financial advisors think a spot bitcoin ETF will be approved at some point in 2024, and a widely circulated report by Maxiport suggested that "SEC Chair Gensler is not embracing crypto [...] and it might even be a very long shot to expect that he would vote to approve Bitcoin Spot ETFs," recent developments have lead many to believe the approval of such products to be imminent.

A spot bitcoin ETF would expose institutional and retail investors to bitcoin without them having to take on the risk of directly investing in the asset. For the last ten years, the U.S. regulatory agency has refrained from approving this type of investment fund, citing fears of market manipulation and the belief that issuers would be unable to protect investors from the high volatility of crypto markets.

Everything changed in October when the SEC failed to appeal the loss of its court case against Grayscale Investments, which judged the Commission to be "arbitrary and capricious" for its decision to reject the conversion of Grayscale's Bitcoin Trust to an ETF. The price of Bitcoin began to rise, and asset management firms began to exercise more pressure for their proposals to be accepted.

Now that 2024 is here, the market is moving in a frenzy to get everything ready for approval, with the SEC being among the most proactive market players.

On Wednesday, sources reported that the SEC had meetings with the Nasdaq, the New York Stock Exchange, and the Chicago Board Options Exchange to discuss bitcoin-based funds for institutional and retail investors. According to Bloomberg Chief Analyst Eric Balchunas, such encounters are a standard procedure before a new type of financial instrument begins trading and would only occur if approval was happening. 

Following the regulator's lead and also moving things forward, Grayscale, Ark Investments, Valkyrie, Fidelity and VanEck have all filed Form 8-A, officially registering their securities so they can be offered on exchanges.

The Commission has also made known some of the concerns it has regarding spot bitcoin ETFs, which stretch from redemption models and authorized participants to hard forks and airdrops. In the past few weeks, it has held meetings with several of the 13 asset management firms with pending spot bitcoin ETFs, to work through these hurdles.

As a result of these meetings, Grayscale has made changes to its proposal including a cash redemption model - an atypical option that the SEC regards as safer due to the market's volatility. In the cash redemption model, the issuer immediately converts bitcoin to provide investors with cash, rather than the "in-kind" ETF market standard, where investors are allowed to exchange shares for underlying securities.

Asset management firms with pending approvals have also started disclosing their authorized participants (APs), an SEC requirement that is also not a standard procedure. APs are registered broker-dealers that create and redeem the ETFs. BlackRock has cited J.P. Morgan (whose CEO has said he would ban crypto if he were in power), and trading firm Jane Street as its APs. Valkyrie has named Jane Street and Cantor Fitzgerald. Goldman Sachs is in talks to be an AP of both BlackRock and Grayscale's ETFs.

For everything to be approved, the SEC has to change and add spot Bitcoin ETFs to the list of the 19b-4 filing, a form filed by firms to let the Commission know about proposed rule changes, which Bloomberg analyst James Seyffart suggested will happen imminently.

With things seemingly all falling into place, the crypto market and the traditional financial market are waiting in feverish anticipation for next week's decision.