SEC's rejection of BlackRock bitcoin ETF unlikely to derail eventual approval

Though the Securities and Exchange Commission has reportedly rejected filings for a spot bitcoin exchange-traded fund from BlackRock, Fidelity and a handful of other asset managers, crypto-enthusiasts are optimistic that the product will soon achieve approval.

The regulator informed exchanges that the filings weren’t sufficiently clear or comprehensive, the Wall Street Journal reported Friday, citing unnamed sources. While there are already ETFs on the market tracking bitcoin futures or companies that work in the cryptocurrency space, the SEC has rejected around 30 applications for an ETF that tracks the actual price of bitcoin since 2017.

Crypto-enthusiasts believe these products will increase participation in bitcoin investing by allowing investors and financial advisors to buy and sell using traditional brokerage accounts. Many hoped the backing of BlackRock, the world's largest asset manager and provider of ETFs, represented the best chance yet for a product to reach approval.

The fact that the SEC rejected the applications in just two weeks, rather than use more of the 45-day window it has to make a decision, is actually a good sign that the agency is ready to approve the product, said Steve Sanduski, a certified financial planner who coaches and trains advisors.

Past products were rejected for worries about fraud and market manipulation, while this latest round was rejected for not providing enough information about the plans for “surveillance-sharing agreements” with a bitcoin exchange, according to the WSJ.

“By telling the exchanges exactly what was missing in their filings, the applicants will simply answer those questions and resubmit their application,” Sanduski said in an email. “This practically screams, ‘We’re ready to approve.’”

The SEC has cracked down on cryptocurrency players recently, including a lawsuit against Coinbase filed on June 8. By hammering rule-breakers in the space, the SEC is clearing the way for firms who operate within the law, Sanduski said.

“Once the SEC gets comfortable that most market manipulation can be rooted out, and any remaining manipulation can be tracked and prosecuted, I think we’ll see the ETFs get approved,” he said.

The price of bitcoin has surged 20% since BlackRock announced its application. Shares of Coinbase, which is listed as the custodian for BlackRock’s holdings, have climbed 30%.

In addition to Fidelity, Cathie Wood's Ark Investment Management, Invesco, WisdomTree, Bitwise Asset Management and Valkyrie have refiled or amended their own applications for a spot bitcoin ETF, according to the WSJ.

It remains to be seen how much a product will encourage more financial advisors to recommend the asset to clients. Some view the risk of allocating to bitcoin as outweighing the reward — in terms of market volatility and client backlash — while there are also traditionalists who will never change their mind about cryptocurrencies, Sanduski said.

“Over time, as bitcoin continues to prove its resilience, I expect most advisors will get comfortable with it and it will become a rather common allocation,” he said.