Failed Cases of Bitcoin Spot ETFs

Looking back at history, the majority of Bitcoin Spot ETF applications were concentrated in 2021. According to data, around 13 traditional and crypto-related investment/asset management institutions attempted to submit applications for Bitcoin Spot ETFs to the SEC in 2021. These included Fidelity, SkyBridge, Grayscale, Ark Invest, and Invesco.

The reason for this application surge was primarily influenced by the appointment of Gary Gensler at that time. As a staunch supporter of the cryptocurrency industry and Bitcoin, Gary Gensler took over as the SEC Chairman, bringing a positive sentiment to the entire market. This sentiment sparked the competition surrounding Bitcoin Spot ETFs.

However, later he became a "Betrayer" of the cryptocurrency market. If you're interested in Gary Gensler's story, you can read our character biography series: "Gary Gensler — What Else Can the Man Bring to the Table"

Nevertheless, due to the immaturity of the Bitcoin market at the time and the SEC's concerns about regulation, the applications for Bitcoin Spot ETFs faced complete failure. This battle surrounding Bitcoin ETFs ultimately concluded with a bitter defeat for the institutions.

Now, let's examine two examples and analyze the main reasons for the failure of this round of applications.

Fidelity

In May 2021, Cboe BZX submitted an application proposal for the Wise Origin Bitcoin Trust to the SEC. This ETF was initiated by Fidelity, with Fidelity Service Company Inc as the sponsor, Fidelity Digital Assets Services, LLC as the custodian, and Delaware Trust Company as the trustee.

After a lengthy 240-day review process, the SEC made the decision to reject the application on February 1, 2022. The reason cited by the SEC was that the issuance of a Bitcoin Spot ETF required a Surveillance-Sharing Agreement (SSA) to fulfill regulatory requirements.

The Surveillance-Sharing Agreement (SSA) is an agreement between cryptocurrency exchanges and market regulatory bodies. This agreement allows both parties to share trading data and information for monitoring purposes. If suspicious trading data or information arises, it will be simultaneously shared with regulatory bodies, ETF issuers, and exchanges. The SSA is commonly used in cases involving financial products like ETFs. It can enhance the effectiveness of financial market monitoring, assisting regulatory bodies in detecting market manipulation, fraudulent activities, and other improper trading practices.

In the application files, Cboe BZX had not added the SSA. Consequently, the SEC deemed that this ETF might carry risks related to fraud and market manipulation, leading to the application's rejection.

Grayscale

In October 2021, NYSE Arca submitted an application proposal to the SEC for the conversion of the Grayscale Bitcoin Trust (GBTC) into a standard Bitcoin Spot ETF. If approved, GBTC would support redemptions, and its price would be anchored to the real-time Bitcoin price.

According to the documents, this ETF was initiated by Grayscale, with Grayscale Investments, LLC acting as the sponsor, and Coinbase Custody Trust Company, LLC serving as the custodian. The trustee was the Delaware Trust Company.

In July 2022, the SEC rejected Grayscale's application. The reason mirrored the one provided earlier for Fidelity — The SEC believed this ETF could carry risks related to fraud and market manipulation. Although Grayscale filed a lawsuit afterward, ultimately, the application for GBTC met the same fate of failure.

Similar to Fidelity and Grayscale, other Bitcoin Spot ETF applications initiated in the same year also faced rejections by the SEC. These applications were all drawn out through the response period and then received the same refusal reasoning (lack of Surveillance-Sharing Agreement, SSA).