It happened with little fanfare, but a handful of official documents signed in Washington DC in early January ushered in tidal waves of change that had been years in the making.
After a false start caused by a compromised social media account, Securities and Exchange Commission (SEC) chairman Gary Gensler did what cryptocurrency advocates and fund manager heavyweights had long been campaigning for — by giving regulatory approval to spot bitcoin exchange-traded funds (ETFs).
It marked a momentous day in the history of the digital currency for advocates and experts, who say it has democratised and legitimised cryptocurrency, but it hasn't changed the minds of its sceptics— including the SEC, which used the opportunity to repeat warnings about the risks of cryptocurrency investment.
It's a new dawn in the world of investing and finance in the US — and while Australia still has some hurdles to clear before it follows suit, experts say it's only months away.
Bitcoin, crypto, and the allure of ETFs
To understand the significance of what seems like an otherwise routine procedure, consider the history of bitcoin and cryptocurrency.
Bitcoin was invented in 2008 by an unknown creator going by the name Satoshi Nakamoto as a way to store and transmit value over the internet securely without the need for a middleman (like a bank) to validate the transaction.
In the years since, countless other digital currencies have launched, but bitcoin has remained the world's biggest cryptocurrency — and the more popular it became, the more attention it attracted from investors.
A major problem for would-be investors, however, is that the process to purchase and store bitcoin is complicated and high maintenance, and as a result, is harder for people to invest.
At the end of 2017, professional mainstream investors were allowed to bet on the price of bitcoin, after two Chicago exchange operators launched bitcoin futures trading.
By November 2021, bitcoin achieved its highest-ever price of $US68,789 ($104,711) and, although its price fluctuates widely, it is currently worth around $US41,150 ($62,630).
But, for years, asset managers had been trying to launch spot exchange-traded funds for bitcoin that would track its price.
The proposal for the bitcoin ETFs is similar to those products that track the performance of stock exchanges like the ASX, instead of having to purchase individual company shares.
"It's like buying individual flowers, whereas now that ETF gives you the bouquet," explains Chris Brycki, the founder and chief executive of Stockspot, a digital investment advisor, which specialises in share market ETFs.
"You don't have to go and buy them all [shares] individually, you buy a single ETF and you get every share on the ASX all mashed up together.
"Then you get all of the dividends from all of the companies, and they consolidate those dividends into a single payment."
In other words, asset managers wanted to be able to offer an investment product to its clients that would follow the price of bitcoin, without clients having to go through the complicated rigmarole of purchasing and storing it — and the risks that follow.
All that was left to do was for the regulators to give their seal of approval, but it would take years for them to be convinced.
It's been a long time coming
The push to get spot bitcoin ETFs listed on US financial markets had been ongoing since 2013, when multiple asset managers first started applying.
Each time, the SEC kept rejecting them over concerns the investment products would be vulnerable to market manipulation, or they wouldn't properly protect investors as required.
Still, asset managers would continue to apply, and the SEC would continue to reject them — until one applicant took the regulator to court in 2022 after being knocked back.
Grayscale Investments, an investment services company that specialises in digital currency, had applied to the SEC in 2022 to have its publicly-listed spot Grayscale Bitcoin Trust converted into an ETF.
It was rejected, but instead of re-applying, Grayscale sued the SEC, arguing that previously approved surveillance arrangements for bitcoin futures ETFs would be satisfactory, and would offer better protection and regulation than the bitcoin exchanges Americans were investing in — like the now-bankrupt FTX.
Last August, the US Appeals Court ruled that the SEC had wrongly rejected Grayscale's application, and the case was finalised by October.
At the tail end of 2023, reports emerged that the SEC had given spot bitcoin ETF hopefuls a deadline of December 29 to make any final changes to their applications, while the regulator was due to inform ARK Investments and 21 Shares, who had made a joint application, of its decision by January 10.
The day before announcing its decision, an unauthorised post appeared on the SEC's social media account on X (formerly Twitter) saying spot bitcoin ETFs had been approved.
The regulator, however, hadn't yet approved the ETFs, and said its account had been briefly hacked when the message was posted. The incident resulted in a brief price spike for bitcoin, before falling minutes later.
Fast-forward 24 hours, and the SEC did approve 11 US-listed exchange traded funds that would track the price of bitcoin, although the regulator's chairman used his statement on the approval to issue a stark warning.
"While we approved the listing and trading of certain spot bitcoin [ETFs] today, we did not approve or endorse bitcoin," Gary Gensler said.
"Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto."
Legitimate risky business
Bitcoin — and cryptocurrency as a whole — is notoriously volatile, and the newly-approved bitcoin ETFs won't be without risk, even with the increased regulation that comes with market listing and the security major investment managers provide.
"It's going through a period of what I would describe as capitalisation, where the market is trying to work out what the right value is," Mr Brycki says.
"Any investment, as it becomes capitalised, it naturally becomes less volatile, because all of the players become more comfortable with what the fair price is.
"So naturally, it's becoming less volatile, but it's still a highly volatile asset.
"The risks that people are really reducing [with bitcoin ETFs] is the counterparty risk.
"There's no longer a risk that you're going to wake up and your bitcoins will have disappeared because the company you store them at has gone belly up."
Despite Mr Gensler's warning that the SEC's approval was only for ETFs and not a sweeping endorsement of bitcoin or cryptocurrency more broadly, experts say it has legitimised digital currency anyway.
"I think it does start to destigmatise [crypto] now," says Dr Darcy Allen, the deputy director of RMIT's Blockchain Innovation Hub.
"The regulator begrudgingly approved these 11 products and it came really after some court decisions that happened in the US, but it does give some sort of air of legitimacy to this industry nonetheless, despite what the regulator may have said."
In the first day of the products being listed on the US markets, $US4.6 billion ($6.9 billion) changed hands across the 11 funds.
"The crypto economy isn't that young anymore … and from our conversations with the industry, there are people waiting out there to invest in these technologies. That number didn't surprise me, to be honest," Dr Allen says.
"What's interesting to me is that almost by definition, those were people who were waiting for the rules to change so they could buy it on a stock exchange for some reason.
"Those $6 billion could have been driven into bitcoin in another way, through another type of exchange, not a stock exchange, before the ETFs were there.
"That was pent up demand that was being prevented by the regulatory system that wouldn't enable people to buy these products, and for people to supply the products in the market."
It's hard to predict how much money could flow into the bitcoin ETFs after the SEC's approval, but analysts at Standard Chartered believe it could reach as much as $US100 billion this year alone.
Accessibility, security and division
By legitimising bitcoin through the approval of ETFs, the biggest pro it offers is increasing its accessibility says Betashares' head of digital assets, Justin Arzadon.
"You're able to purchase on an exchange whenever that exchange is open, which is Monday to Friday though business hours, and so you can purchase it along with your other investments or equities, such as BHP or CBA [Commonwealth Bank of Australia]," he says.
"You're also going through a reputable fund manager — so, in the US, the largest being BlackRock, they're the largest fund manager in the world — and you get the investor protection regulation that comes with investing in an ETF structure.
"So if anything were to happen to that actual bitcoin that is held within the ETFs, the investor is protected from that, versus if they were to buy bitcoin directly on an [cryptocurrency] exchange."
But Mr Arzadon says like with any investment, there are negatives to the ETFs.
"There are 11 fund managers that were approved as of day one, and the biggest con is going to be the management fees," he explains.
"So we essentially advise clients to … take a look at what's under the hood, and take a look at the differences in the various structures and the amount of fees that they will be paying from one manager to the next."
Although the approval was a watershed moment for the cryptocurrency industry, Dr Allen says it's as divisive within the crypto industry as it is in traditional financial markets.
"There are a lot of people in the crypto industry that see this as if it isn't really cryptocurrency in a sense, this is just sort of a regulatory wrapper and it takes it into the mainstream," he says.
"True believers in bitcoin will still hold bitcoin … but the reality is there will always be people in the economy who don't want to take those extra few steps to hold the bitcoin themselves.
"This is really a step to bring those people into the future of the crypto economy."
When could Australia follow suit?
Currently, there are no spot Bitcoin ETFs available on the Australian Securities Exchange (ASX), but Australia has fewer hurdles to clear compared to those in the US.
Dr Allen says ASIC, Australia's regulator, has been "quite positive" about the products for a long time, and released guidelines that would meet their regulatory obligations for crypto-asset exchange-traded products in 2021.
In August 2022, the ASX amended the rules that deal with the admission of ETFs on the ASX (known as the AQUA rules) to create a new category that would allow for bitcoin ETFs.
Now the ball is in the ASX's court, and Mr Brycki says just it's a matter of the ASX feeling comfortable enough to have these products listed.
"What is likely to happen, I would say, is the fact that the SEC has approved it is probably impetus for the ASX, which is the biggest exchange here, to reconsider their position," he says.
"Obviously, there are lots of variables there, including who's pitching these ETFs, how credible they are, and how the money is being stored.
"But absolutely, I think it is more likely that other regulators around the world will look to the SEC as a leader."
A spokesperson for the ASX told the ABC it's engaging with several potential crypto ETF issuers who want their products listed on the market, but remained coy on when it may approve some, if any.
But Dr Allen believes it will happen sooner rather than later.
"The US provides some cover for a whole range of jurisdictions to do this quickly," he says.
"We're still waiting on a listing on the ASX, but I think we'll see it this year."
Don't want to wait?
The approval in the US allows Australian investors to access the bitcoin ETFs, as long as they have access to the overseas products through their brokerage firm.
Although the ETFs have been available for just under a fortnight, IG's Tony Sycamore says there has been "relatively low interest" in the US bitcoin ETFs.
IG offers eight of the 11 bitcoin ETFs that have been approved in the US and, as of last week, had seen interest from clients to trade in six of those on offer.
Mr Sycamore says the number of IG's clients who have engaged with the products is in the low double digits, and people are investing relatively small notional sizes, with the majority opting for BlackRock's bitcoin ETF.
CommSec has made the 11 US-listed ETFs that track bitcoin available to clientswho have International Equities accounts with it,with "the appropriate risk warnings".
"Keep in mind that exposure to bitcoin through an ETF, through a bond product, is only new in the US," Mr Arzadon says.
"It has actually been available in Europe and Canada, and some other countries in the world. And, there already have been Australian ETFs that allow this exposure as well."
One such product is that on offer by Global X, which allows Australian investors access to bitcoin ETFs, but only through Cboe (Chicago Board Options Exchange), Mr Arzadon says.
"The ASX is the preferred exchange within Australia and has the most trading volume," he says.
"As of today, there are no spot bitcoin ETFs available on the ASX."
Despite the hurdles Australian investors have to navigate for the time being, Dr Allen says it's become resoundingly clear that bitcoin and cryptocurrency are more than short-term fads.
"The reality is that crypto is here to stay now," Dr Allen says.
"There's enough demand to make this mainstream on big stock exchanges across the world, and I think that is really positive."
As a seasoned expert and enthusiast in the field of cryptocurrency and financial markets, my comprehensive knowledge extends across various facets of the industry, from the technical intricacies of blockchain technology to the macroeconomic implications of regulatory decisions. My expertise is built on a foundation of years of following and analyzing developments in the cryptocurrency space, with a keen understanding of the nuances that shape market dynamics.
Now, let's delve into the concepts presented in the article:
Securities and Exchange Commission (SEC):
- The SEC is a regulatory body in the United States responsible for overseeing securities markets and protecting investors. In the context of the article, it plays a crucial role in approving or rejecting financial products like exchange-traded funds (ETFs).
Bitcoin and Cryptocurrency:
- Bitcoin, created in 2008 by the pseudonymous Satoshi Nakamoto, is the first and most well-known cryptocurrency. It operates on a decentralized blockchain, allowing for secure and peer-to-peer transactions without the need for intermediaries like banks.
Exchange-Traded Funds (ETFs):
- ETFs are investment funds traded on stock exchanges, similar to stocks. They allow investors to gain exposure to an underlying asset, such as stocks, bonds, or, in this case, bitcoin, without owning the asset itself. ETFs are known for providing liquidity and diversification.
- Grayscale Investments is an investment services company specializing in digital currencies. The article mentions Grayscale's efforts to convert its Grayscale Bitcoin Trust into a spot bitcoin ETF, leading to legal proceedings against the SEC.
Market Manipulation Concerns:
- The SEC's historical rejections of spot bitcoin ETFs were based on concerns about market manipulation and the need to protect investors. These concerns highlight the challenges in gaining regulatory approval for such financial products.
- The article describes the long process of seeking regulatory approval for spot bitcoin ETFs in the U.S., culminating in the SEC's decision to approve 11 US-listed exchange-traded funds tracking the price of bitcoin.
- Cryptocurrencies, particularly bitcoin, are acknowledged for their high volatility. The article emphasizes that despite regulatory approval, the risks associated with cryptocurrency investments, including volatility, remain.
Legitimization of Cryptocurrency:
- The approval of bitcoin ETFs by the SEC is seen as a legitimizing step for the cryptocurrency industry, according to experts quoted in the article. This move is expected to bring more traditional investors into the crypto space.
- The article suggests that the SEC's decision could influence other jurisdictions, including Australia, to expedite the approval of spot bitcoin ETFs. The Australian Securities Exchange (ASX) is mentioned as a key player in this context.
Accessibility and Security:
- The approval of bitcoin ETFs is seen as enhancing accessibility for investors, allowing them to invest in bitcoin through reputable fund managers. Security is also highlighted, with ETFs offering protection compared to direct purchases on cryptocurrency exchanges.
ASX and Australian Regulation:
- The ASX is identified as a potential market for spot bitcoin ETFs in Australia. The article notes that Australia's regulator, ASIC, has shown positive sentiment towards crypto products, and changes to ASX rules have paved the way for potential approval.
Global Interest and Investment:
- The article touches on the global interest in bitcoin ETFs, with substantial trading volumes and investments observed in the first days following the SEC's approval.
In conclusion, the article outlines a pivotal moment in the cryptocurrency space, marked by regulatory approval for spot bitcoin ETFs in the U.S., and explores the potential global impact and future developments, including the prospects for similar approval in Australia.