Gary Gensler post-exchange listing approval for Bitcoin ETF includes a stark '1940 Act' warning to RIAs not to read too much tolerance into it
The SEC head bent to the will of the Stamford, Conn, fund firm's lawsuit and rivals -- BlackRock, Fidelity and eight others -- piled on for the ride, but ETF price spreads are wide and likely headed for a shakeout.
6 min read- SEC approved 11 spot Bitcoin ETFs, but Gensler issued a stern warning.
- Gensler cautioned RIAs against misinterpreting the approval as Bitcoin endorsement.
- Grayscale's legal victory forced the SEC's hand, opening the door for competitors.
- Expect high fees, especially from Grayscale, impacting potential revenue significantly.
Brooke's Note: Bitcoin's price is up a modest 1.45% today (Jan. 10), despite a giant breakthrough – SEC approval of 11 spot Bitcoin exchange traded funds (ETFs). The ETF heavyweights are now poised to buy the cryptocurrency like crazy, starting Thursday. (Except for Grayscale, they have nothing to sell.) Yes, much of the long-anticipated approval was already priced into the crypto coin. But SEC head Gary Gensler's Bitcoin approval letter had to be highly unsatisfying -- it truly seethed with disapproval. It even contains explicit warnings that the SEC still has a whole arsenal of ways to rein in Bitcoin abuses, including by RIAs. Even if the Bitcoin ETF horse is out of the barn, it's a chilling read, and perhaps it should be.
The Securities and Exchange Commission (SEC) finally issued wholesale approval of 11 spot Bitcoin ETFs, but SEC head Gary Genslar's dour commentary came across like a judge forced to let a murderer out of jail on a technicality.
The SEC chair published several hundred words today with a message that confirmed his agency's acquiescence, but it seethed that Grayscale's lawsuit forced his hand.
Grayscale also paid a steep price for its victory.
Not only did it carry the legal load, but it ended up dragging all its come-lately rivals in its wake, including BlackRock, Fidelity, WsidomTree, Valkyrie, Van Eck, Invesco and Franklin Templeton.
All of their ETFs are expected to begin trading Thursday (Jan. 11).
Genslar starkly warned RIAs and registered reps to expect no SEC leniency if their use of Bitcoin ETFs goes astray of client best-interest demands of the Investment Advisors Act of 1940 or Regulation Best Interest (BI).
It added that the approval forms no precedent for other crypto applications. See; The RIA business can heave a sigh of relief as Grayscale beats the SEC in court and its GBTC fund soars in value
Cold shoulder
“While we approved the listing and trading of certain spot Bitcoin [Exchange Traded Product] ETP shares today, we did not approve or endorse Bitcoin,” Genslar wrote.
"Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.
“Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast, Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering… sanction evasion and terrorist financing.”
The Bitcoin spot market – expected by some traders to soar upon Bitcoin ETF approval – was mostly neutral, although it's trading just off its 52-week high of $47,893.70, after hours.
Grayscale Investments is suing the SEC to get its ETF approved but bitcoin's swoon means 'public sympathy' may swing in favor of the regulator, a rules lawyer says
High fees
Grayscale's legal victory trumped myriad SEC concerns, as far as exchange listings go, Gensler admitted.
“We are now faced with a new set of filings similar to those we have disapproved in the past,” he wrote. “Circumstances, however, have changed.
"The U.S. Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale’s proposed ETP (the Grayscale Order).” See: Grayscale Investments is suing the SEC to get its ETF approved, but Bitcoin's swoon means 'public sympathy' may swing in favor of the regulator, a rules lawyer says
Grayscale also earned a measure of disapproval in press reports that zeroed in on its 150-basis-point ETF fee – albeit lower than the 200-basis-points it currently charges for its pre-converted closed-end fund.
Grayscale earns $540 million annually on $27 billion of assets with a fee of two percent and $405 million on that same amount of AUM at the new 1.5% fee.
Were it to drop its fees to 50-basis-points, the revenues, hypothetically, would drop staggeringly to $135 million.
No first mover
Fidelity, Wisdom Tree Invesco and BlackRock are all waiving their fees for six months and then only levying fees in the range of 25- to 39-basis-points.
Story Timeline
What is the Grayscale pricing strategy?
“I've got to think they'll struggle to attract assets,” writes Jeff DeMaso, editor and founder of The Independent Vanguard Adviser. "We've never seen an approval like this before, where 11 ETFs all get the green light at the same time.
“So, no one gets first mover status ... I guess Grayscale has a big AUM advantage out the gate, but they have a big expense disadvantage.”
Sweet spot
BlackRock believes that 33 is the charm as it applies to sell a spot Bitcoin ETF, after 32 prior attempts met failure at the SEC -- part of a new gold rush of applications
The high Grayscale ETF fee may simply be a precursor to fast-ensuing price cuts, according to one industry observer.
"It's trivial for them to drop the fee, but difficult to raise it after conversion," Scott Johnsson, former Davis Polk attorney and GP at Van Buren Capital, wrote on X, as first reported by CoinDesk.
"Seems to me that if they're trying to find the sweet spot of minimizing asset under management (AUM) declines and maintaining fees, it's not so outrageous to start out at a ‘high’ level and then adjust."
Grayscale, which hits the ground running with $27 billion of assets, said they expect the Grayscale Bitcoin Trust (GBTC) will “continue to be a best-in-class offering for investors," according to a Bloomberg article.
It cited their “liquidity, tight spreads, high trading volumes, and a decade-long track record of operational success."
GBTC was trading at $40.50, up $1.50 or 3.84% at the close of today's trading.
Stern warnings
Just because the ETFs are SEC-approved doesn't mean the funds won't hit regulatory icebergs down the way, Gensler warned.
"It is important to note that today’s action does not endorse the disclosed ETP arrangements, such as custody arrangements.
“These products will be listed and traded on registered national securities exchanges,” he noted.
"Such regulated exchanges are required to have rules designed to prevent fraud and manipulation, and we will monitor them closely to ensure that they are enforcing those rules.
“Furthermore, the Commission will fully investigate any fraud or manipulation in the securities markets, including schemes that use social media platforms.”
Cabined to ETPs
RIAs and other financial advisors were put on notice by Gensler that buying a Bitcoin ETF isn't a get-out-of-jail-free card.
"Existing rules and standards of conduct will apply to the purchase and sale of the approved ETPs.
"This includes, for example, Regulation Best Interest when broker-dealers recommend ETPs to retail investors, as well as a fiduciary duty under the Investment Advisers Act for investment advisers.
“Today’s action does not approve or endorse crypto trading platforms or intermediaries, which, for the most part, are non-compliant with the federal securities laws and often have conflicts of interest.”
“Importantly, today’s Commission action is cabined to ETPs holding one non-security commodity, Bitcoin," he added.
It should in no way signal the Commission’s willingness to approve listing standards for crypto-asset securities.”
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