Today, Gary Gensler, the Chairman of the Securities and Exchange Commission (SEC) received a letter from two U.S. Congressmen, Tom Emmer and Darren Soto. The Congressmen were urging Gensler to approve a spot bitcoin ETF.
This famous letter has caused such a buzz on social media, especially among crypto enthusiasts. In this letter, the two lawmakers explain in great detail why the spot bitcoin ETF needs authorization for trading in the country.
Part of the letter read; “Bitcoin spot ETFs are based directly on the asset, which inherently provides more protection for investors.”
It also went ahead to state; “We question why, if you are comfortable allowing trading in an ETF based on derivatives contracts, you are not equally or more comfortable allowing trading to commence in ETFs based on spot Bitcoin.”
Investors Prefer Spot-Based ETFs
According to Emmer and Soto, investors mostly prefer spot-based ETFs . This is because they give investors direct exposure to the asset, unlike the futures ETFs which are based on derivatives. They made this claim from a comparison of the gold spot and futures ETF market. The futures gold ETF DB Gold Fund (DGL) traded $50.4 million over the last 15 years. This is a drop in the ocean in comparison to the ETF SPDR Gold Trust (GLD); whose trade is over $55.5 billion within the same period.
“It is our understanding that previously the SEC chose not to approve a Bitcoin futures ETF or a Bitcoin spot ETF due to concerns about the perceived potential for fraud and manipulation in the Bitcoin markets,” The SEC clearly articulated that these concerns could be addressed by demonstrating;
That the underlying Bitcoin market is inherently resistant to fraud and manipulation (or that there are other means to prevent fraudulent and manipulative acts and practices).
That a significant amount of trading took place on a regulated market (for instance, if the CME-traded Bitcoin futures market were to become the leading source of price discovery in the Bitcoin market).
the letter went on.
Please note that neither of these requirements state a preference for Bitcoin spot ETFs or Bitcoin futures ETFs.”
Disputing the Theory That Spot Bitcoin EFTs are Susceptible to Fraud
The two lawmakers explained that the pricing index that the bitcoin futures ETFs track, CME CF Bitcoin Reference Rate (BRR), gets 90.47% of their price data from bitcoin exchanges like; — Coinbase, Bitstamp and Kraken. This, they believe, means that any form of fraud or manipulation in the market would not only impact spot bitcoin ETFs. It would also affect the “legal” bitcoin futures ETFs.
“For this reason, whether one, both, or none of these requirements has been met, the SEC should no longer have concerns with Bitcoin spot ETFs and should show a similar willingness to permit the trading of Bitcoin spot ETFs,”
the letter explained.
In their letter, Emmer and Soto point out that after the SEC denied or delayed spot BTC investments in the country, alternative spot Bitcoin investment vehicles have cropped up. These have gained over $40 billion worth of assets. Allegedly, some of these proceeds keep trading on over-the-counter markets at prices discounted prices compared their net asset value (NAV).
“Permitting futures-based ETFs while simultaneously continuing to deny spot-based ETFs would further perpetuate these discounts and clearly go against the SEC’s core mission of protecting investors,” the letter emphasized.