Traditional Finance Gauges Digital Asset Alternatives Through the Bitcoin ETF Gambit: Exploring the Landscape

Back in 2017, traditional finance was naturally skeptical of cryptocurrencies. Roll forward to 2023, and BlackRock BLK, under Larry Fink’s governance, is spearheading a new attempt to overturn the SEC’s refusal for spot Exchange Traded Funds (ETF) covering Bitcoin BTC/USD. Yet as the world’s largest asset manager with $9.4 trillion in assets — three times more than France’s GDP — what motivates BlackRock’s legal push? How probable is its success, and what are the implications for traditional finance firms and the decentralized finance industry?

BlackRock Filing: The Story

On June 15, BlackRock submitted a surprise filing to the SEC indicating a desire to launch a new ETF that will derive its value solely from spot Bitcoin prices. This is not a novel concept as in 2022, the SEC rejected Fidelity’s application, citing concerns over inadequate surveillance, market manipulation, and potential fraud.

This led industry commentators to believe that BlackRock knows something that others don’t. Indeed, that may be true: BlackRock is the king of the passive investment game and boasts an impressive ETF filing approval rate of 575 to 1. The secret to BlackRock’s filing is exactly the Achilles heel of its predecessors — security. Confronted by the SEC about “unclear filing”, Nasdaq refiled BlackRock’s application on July 3, stipulating a Nasdaq-Coinbase agreement clause under which both sides will collaborate in market surveillance and share the exchange’s data on spot transactions.

That set a precedent. Post-BlackRock filing, surveillance-sharing agreements were included in Fidelity’s, Invesco’s, and WisdomTree’s refilings to the SEC, reflecting traditional finance’s sustained desire for digital asset products.

Grayscale Lawsuit

BlackRock's filing isn’t the sole reason for the reinvigorated interest in Bitcoin spot ETFs. Grayscale Bitcoin Trust (GBTC) is the largest crypto investment vehicle globally with a closed-end trust totaling more than $23.3 billion in assets, but less than 0.5% of the overall Bitcoin market cap. 

Grayscale’s CEO Michael Sonneshein has long pushed for the trust’s conversion into an ETF, as this would allow continuous issuance and redemption of shares and would close the price-NAV discount. However, the SEC rejected Grayscale’s application. 

This time, however, the matter went to the court. Grayscale appealed the decision to not approve the Bitcoin futures ETFs like the ProShares Bitcoin Strategy ETF noting the regulator’s inability to draw a distinction between potential market manipulation on wider futures and spot markets. As the court sided with Grayscale, the company continued meeting with the SEC to discuss the technical nuances of the transition and even made an agreement with BNY Mellon. This time is truly different — TradFi has finally made it to the Web3.

Why BlackRock is Interested in Bitcoin

Besides Blackrock’s goal to democratize investing, there is another reason why the asset manager is interested in spot Bitcoin ETFs. These ETFs are an important step into digital asset alternatives and tokenization, providing Blackrock’s investors with opportunities for wider portfolio diversification and more seamless cross-asset trading.

Then there is a potential revenue stream. Despite its low liquidity (trust shares trade once per day), ongoing litigation, and discount-to-NAV, Grayscale earns around $380 million in annualized fees. Considering its size and client loyalty, BlackRock would earn a lot more, especially if it develops additional altcoin spot ETFs. Currently, both Bitcoin and altcoin ETFs are available on centralized crypto exchanges like Bitrue. However, the lack of regulation and transparent reporting guidelines prevent some investors from entering these markets, leaving the field for retail investors. It is also difficult to estimate the total market size and gauge the demand for diversification and liquidity.

The TradFi Digital Asset Revolution: Likely, but Not Immediate

BlackRock, like HSBC with its tokenization plans, appears determined to recognize the opportunities and value of Bitcoin trading as a step towards wider digital asset alternative investment products.

The firm already manages the iShares Blockchain and Tech ETF that invests in mining infrastructure and exchanges like Coinbase. Yet, over more than a year, the ETF has yet to reach $10 million in assets. 

Furthermore, although the potential success of BlackRock will become an important milestone in the regulation of digital assets, this is not the first time TradFi is flirting with digital asset cryptocurrencies. For instance, BlackRock’s Aladdin partnered with Coinbase Prime in 2022, offering custody and prime brokerage for institutional investors, while Fidelity owns a standalone crypto trading platform.

Still, the spot ETF filings are likely to cause an expansion of the Bitcoin investor base. Moreover, Bitcoin ETFs will provide institutional and more conservative investors the option to indirectly own low-covariance assets and benefit from Bitcoin appreciation without exposure to the industry’s infrastructure. This could result in a significant increase in Bitcoin’s market capitalization, but that creates problems too. 

On Oct 16, Cointelegraph released a false tweet claiming that the SEC approved BlackRock’s filing. In the following hours, Bitcoin’s price skyrocketed by more than 11%. While more optimistic commentators speculate that an actual confirmation could lead to a threefold increase, many think a 50-100% appreciation could occur, putting Bitcoin’s market capitalization near $1.5 trillion.

Whatever the case, Blackrock appears to know what it’s doing while the market is rife with excitement at the prospect of a more legitimized digital asset industry. 

This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.