The Last Hurdle for Bitcoin ETFs: Authorized Participants
As the deadline for the Securities and Exchange Commission (SEC) to make a decision on spot Bitcoin ETFs approaches, potential issuers face one final obstacle: authorized participants. Bloomberg Intelligence analyst Eric Balchunas believes that each Bitcoin ETF applicant must have clear authorized participant parameters in its S-1 filing before it can be considered for approval. Balchunas suggests that an authorized participant agreement along with cash could lead to approval.
What Are Authorized Participants?
An authorized participant is an organization other than the issuer that is permitted to create and redeem shares of an ETF. Typically, large banks and financial institutions fulfill this role. The presence of more authorized participants increases liquidity in an ETF. They can create new shares when there’s a shortage in the market or reduce the number of shares when there’s an oversupply. This helps maintain the ETF’s share price in line with its underlying asset—in this case, Bitcoin.
The SEC’s Concerns
The SEC has long been hesitant to approve a spot Bitcoin ETF due to concerns about market manipulation and reliable price discovery. In a screenshot shared by Balchunas, half of the Bitcoin ETF hopefuls still allow for share creation with cash or in-kind. However, the SEC is unlikely to approve in-kind share creation as it involves registered brokers using Bitcoin, which is not allowed.
Potential Approval on the Horizon
In recent months, regulators have been engaging in meetings and calls with potential issuers such as Grayscale, Valkyrie, and BlackRock. Speculators believe that if the SEC has invested significant effort in helping applicants refine their S-1 filings, it indicates a potential approval in the future. Currently, there are over a dozen Bitcoin ETF applicants awaiting consideration by the SEC. BlackRock’s iShares Bitcoin Trust, in particular, has undergone three amendments to its S-1 filing, with the latest explicitly stating that only cash can be used to create shares.
Hot Take: The Road to Bitcoin ETF Approval
The SEC’s requirement for explicit authorized participant parameters poses a challenge for potential Bitcoin ETF issuers. However, if applicants can establish clear agreements with authorized participants and utilize cash instead of in-kind creation, approval may be within reach. The involvement of authorized participants is crucial for maintaining liquidity and aligning the ETF’s share price with Bitcoin’s value. With regulators actively working with applicants and multiple firms vying for approval, the anticipation for a spot Bitcoin ETF continues to grow. Only time will tell if the SEC will finally grant access to this long-awaited investment product.
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