SEC Kicks Off Countdown on Grayscale’s Spot Bitcoin ETF, Futures ETF Mania Put on a Pause by FCM

The Bitcoin Futures ETF that has been the fastest fund to capture $1 billion in assets has come to a stop. Before the US Securities and Exchange Commission’s (SEC) approval of BITO, several firms had filed for such a product.

At least four Bitcoin ETFs tied to futures were expected to begin trading in October, but ever since then, only two products from ProShares and Valkyrie Investments have made their debut.

Though several funds are expected to start trading in the coming weeks, a similar ETF from VanEck is on hold despite the 75-day window for regulators to reject or delay it has “long passed.”

This delay is reportedly due, in part, to Futures Commission Merchants (FCM), which act as an intermediary between the funds and the exchanges where those contracts trade. FCMs are typically banks that handle the buy and sell orders for futures contracts on behalf of their clients and settle these trades with exchanges, in this case, CME. The immense demand seen for BITO, which accumulated $1.1 billion in just two days, has FCMs reportedly thinking twice.

“The cash influx quickly ate up the balance sheet of the firm acting as an FCM for BITO at its launch, putting regulatory capital limitations against the Bitcoin futures exposure in sight,” reported Bloomberg, citing a person familiar with the matter.

As we saw, the inflows into BITO also had the fund pushing out purchases into further-out futures to avoid breathing front-month position limits. As it did last month, now one trading day into November, the ETF has already purchased December contracts.

SEC Chair Gary Gensler approved futures ETF and not spot-based because he said the former provides more investor protection. Futures contracts trading on regulated CME requires more margin.

“We disagree with them and believe they've lost the forest for the trees in their assessment of legal and regulatory minutiae. A spot Bitcoin ETF would be better for all involved,” said James Seyffart, an analyst for Bloomberg Intelligence.

Amidst this, the SEC has officially started the clock for the conversion of GBTC to an ETF, based on which the first possible date for approval if the agency doesn't delay its decision is December 24.

The regulator published a notice this week, soliciting comments on the proposed rule change filed by NYSE Arca. Most recently, it was seeing feedback on VanEck’s application but continued to extend its deadline.

Last month, Grayscale officially filed to convert its GBTC fund to be converted into an ETF. The world’s largest digital asset manager has been thinking of this since earlier this year and intends to convert all its products into an ETF over time.

Towards this move, the asset manager hired veteran David LaValle as global head of ETFs and roped in BNY Mellon for its planning conversion.

First launched in 2013, Grayscale holds $56.5 bln in assets, and its GBTC fund holds about 3.4% of all Bitcoin in circulation.

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