Crypto ETF Conundrum: BlackRock's Regulatory Ripple

In the intricate world of financial jargon, BlackRock's bold assertion against the U.S. Securities and Exchange Commission's (SEC) perceived bias in handling spot-crypto and crypto-futures ETF applications has triggered ripples of debate within the financial intelligentsia.

The confirmation of Nasdaq's approval for BlackRock's "iShares Ethereum Trust" spot-Ether (ETH) ETF on November 9 is now a pivotal milestone in a saga that involves the submission of the 19b-4 form to the SEC, a move orchestrated with precision on behalf of BlackRock.

As the drama unfolds, BlackRock challenges the SEC's modus operandi in scrutinizing spot crypto ETFs, presenting an argument that questions the regulatory framework, specifically the alleged misconceptions between futures and spot ETFs that the SEC relies on for continual denials.

This regulatory dichotomy intensifies as the SEC, while greenlighting numerous crypto futures ETFs, appears to withhold its approval for spot-crypto ETFs. The regulatory rationale pivots on the supposed enhanced regulatory safeguards and consumer protections embedded within the 1940 Act, diverging from the 1933 Act, which encapsulates spot-crypto ETFs.

I took Scott's advice and read Blackrock's argument for approval of a spot ETH ETF.

It's very compelling.

The argument flows from Grayscale's DC Circuit victory: the SEC can't lawfully approve ETH futures ETFs but not a spot ETH ETF. I agree.

Read here: https://t.co/7mwYNWDHRo https://t.co/fAgVBnOBZZ

— Jake Chervinsky (@jchervinsky) November 10, 2023

Adding a layer of complexity, the SEC seems to display a predilection for regulatory and surveillance-sharing collaborations linked to the Chicago Mercantile Exchange's (CME) digital asset futures market, further muddying the regulatory waters.

BlackRock strategically counters these arguments, emphasizing that the SEC's inclination towards the 1940 Act holds little relevance in this context. The restrictions imposed, according to BlackRock, pertain to ETFs and sponsors, not the underlying assets – a nuanced distinction that challenges the SEC's regulatory stance. Within the intricate dance of regulatory approval, BlackRock posits that the distinction between registering ETH futures ETFs under the 1940 Act and spot ETH ETPs under the 1933 Act is, in essence, a distinction without practical difference for ETH-based ETP proposals.

In this regulatory chess game, BlackRock further underscores that the SEC's approval of crypto futures ETFs through the CME implicitly acknowledges the efficacy of CME surveillance in detecting potential spot-market fraud. Thus, BlackRock contends that, under the current trajectory of the SEC's rationale, there seems to be no justifiable reason for the rejection of their application.

I suggest reading this 19b-4 filing closely, specifically the arguments presented in the "Applicable Standard" section (starting pg 12). Keep an eye on (1) '40 Act/'33 Act discussion and (2) significant markets test analysis.

It will likely serve you well in the future. https://t.co/tlemiQzgbr

— Scott Johnsson (@SGJohnsson) November 9, 2023

As this financial narrative unfolds, industry watchers eagerly await the potential climax – the approval of the first SEC spot crypto ETF, possibly tied to the ever-discussed Bitcoin. Bloomberg ETF analysts James Seyffart and Eric Balchunas join the chorus of speculation, estimating a compelling 90% chance of approval before the calendar turns to January 10 next year. The evolving dynamics of regulatory scrutiny continue to be a captivating saga, weaving together the threads of cryptocurrency innovation and traditional financial oversight in a narrative that remains unpredictable.

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