Yesterday, BlackRock iShares filed with the US Securities and Exchange Commission (SEC) to launch a Bitcoin exchange-traded fund (ETF) after the asset manager disclosed a private Bitcoin Trust in August of last year. The SEC has rejected numerous spot Bitcoin ETF applications from various asset managers. The only Bitcoin ETFs that have been approved are tied to the futures markets.

We believe that BlackRock could have done enough to address the SEC’s concerns about spot Bitcoin ETFs.

Based on previous ETF rejections, the SEC wants to see two things. First, you want the pricing to be tied to a regulated exchange, which for now would be a futures market. Second, he wants the futures exchange (CME) to have a shared watchdog arrangement with the ETF, which is Nasdaq for the BlackRock Bitcoin ETF.

That watch deal must already be in place because the Valkyrie Bitcoin Strategy ETF is listed on Nasdaq and is based on CME Bitcoin futures.

So how can the futures market provide a price for a spot market? Whether the spot ETF uses the price used to settle futures when they expire. BlackRock plans to use the CF Benchmarks Index, created by a company regulated by the UK’s FCA. CME uses that same benchmark to settle Bitcoin futures.

Other Bitcoin ETF Spot Rejections

The crux of the SEC’s objections relates to the perception that cryptocurrency prices are rigged.

The second iteration of the Ark/21Shares Bitcoin ETF app was rejected this January, though it is still trying. Ark’s latest app looked at why Bitcoin prices are becoming more reliable.

The Ark ETF used the S&P Bitcoin Index for pricing, which sounds pretty believable. In turn, the S&P index is based on data from the startup Lukka. It uses prices from a dozen exchanges, including Binance and Bitfinex. Another rejected ETF, the VanEck spot Bitcoin ETF used the MVIS CryptoCompare Bitcoin benchmark rate. Both were trying to list on the Cboe BZX Exchange.

In the case of Grayscale’s failed attempt to convert its Bitcoin Trust into an ETF, TradeBlock provides the price index. Both Grayscale and TradeBlock are part of the Digital Currency Group.

By contrast, the CF Benchmarks Index in BlackRock’s app uses half the number of trades compared to the S&P Index. Those exchanges are Bitstamp, Coinbase, Gemini, ItBit (Paxos), Kraken, and LMAX.

Meanwhile, the BlackRock ETF will use Coinbase Custody as custodian and Coinbase as lead broker, expanding on its existing relationship with the crypto exchange. The question is whether Coinbase’s role could delay the ETF given that the SEC is suing the exchange.