The Ripple Effect of Spot Market Bitcoin ETFs How TradFi Impacts the Crypto Industry

The Impact of Traditional Financial Markets on the Crypto Industry Examining the Ripple Effect of Spot Market Bitcoin ETFs

Author: Matan Doyich, CoinDesk; compilation: Song Xue, LianGuai

There is hope to launch a spot market Bitcoin ETF (Exchange Traded Fund) by the end of the year, or rather, the spot market Bitcoin ETF is close to being determined. After years of legal disputes, the U.S. Securities and Exchange Commission (SEC) has missed the deadline to submit an application to the U.S. Court of Appeals, which recently harshly criticized the securities regulator’s biased decision to approve futures-based ETFs while rejecting a substantially similar spot market product.

Although these financial funds traded in the stock market have been traded in Canada and Europe, the spot market Bitcoin ETF is considered the Holy Grail of the cryptocurrency industry. The main reason is largely due to the dozens of applications that the U.S. Securities and Exchange Commission has refused to date, making it impossible for U.S. investors seeking Bitcoin investments without directly purchasing Bitcoin to bear.

For example, Grayscale applied for a spot Bitcoin ETF in October 2021, which was rejected by the U.S. Securities and Exchange Commission (SEC) in June 2022, with far fewer headlines than the ruling by a three-judge panel of the U.S. Court of Appeals in August: regulators “got it wrong.” The court ruling caused a stir in the cryptocurrency and financial world, as it could have some impact on the spot Bitcoin ETF recently submitted by BlackRock.

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When people read headlines like “BlackRock: The Secret Company Owning the World,” it’s not surprising that the price of Bitcoin rose 20% in just 11 days after the world’s largest asset management company announced this news. The initial surge sparked optimism for a future bull market.

Despite BlackRock’s 99.8% record of ETF approvals, it is currently unclear how the SEC will rule, given that the SEC has not previously approved any Bitcoin ETFs and is actively targeting major U.S. cryptocurrency exchanges.

Nevertheless, the association between Bitcoin and BlackRock has brought enough optimism to some Bitcoin and cryptocurrency maximalists, while others are concerned about the excessive power central entities may have in this field.

The Complex Relationship between Traditional Finance (TradFi) and Bitcoin

Considering that BlackRock’s Bitcoin ETF seems to be backed by actual Bitcoin, requiring the asset management company to purchase as much Bitcoin as the ETF it sells, it is evident that this will drive up the price of cryptocurrencies. However, at first glance, institutional interest in Bitcoin and cryptocurrencies is not a new phenomenon. After the Winklevoss brothers submitted the first Bitcoin ETF in 2013, several major financial institutions such as UBS, Citigroup, and Barclays showed interest in cryptocurrencies and blockchain. All of this was before the bull market in 2017.

Since then, institutions of various sizes have continued to explore offering cryptocurrency services to their product lineup. A full ecosystem project dedicated to providing secure infrastructure for institutions to offer services like decentralized finance (DeFi) and tokenized assets has emerged.

For example, GK8, a subsidiary of Galaxy, enables institutions to provide a range of digital asset services and ensures security through its trusted custody platform and flagship product, Cold Vault. These projects that bring institutions to the forefront of cryptocurrencies have helped banks and investment firms find new sources of revenue while expanding the adoption of cryptocurrencies.

The transparency and speed of transactions have prompted banks to collaborate in developing universal blockchain platforms within industry alliances to facilitate faster and smoother capital flow. JP Morgan has been building its own private blockchain network over the years and now plans to release its own cryptocurrency wallet.

As TradFi (Traditional Finance) increasingly engages in cryptocurrencies and the use of blockchain and other cryptographic technologies, it raises the question: besides impacting the price trajectory of Bitcoin, what will the approval of BlackRock’s ETF really bring?

The Crypto Whale

For optimists, the approval of BlackRock’s ETF by the U.S. Securities and Exchange Commission will not only legitimize Bitcoin but also legalize the entire crypto industry. This belief is almost indisputable. BlackRock manages an unprecedented $9 trillion in assets and has 70 offices in 30 countries, acting as a bridge between Bitcoin and incalculable wealth.

When the world’s largest and most prestigious asset management company shows interest in specific assets or asset classes, global investors take notice.

The unresolved regulatory clarity in the United States may also enhance the spirit of mainstreaming Bitcoin. Increased participation from more institutions could improve the competitive edge of traditional financial institutions in offering crypto products and inject capital into the crypto market, leading to price and liquidity increases.

However, price increases do not necessarily mean the long-term sustainability of cryptocurrencies. In the past six years, we have witnessed several bull market cycles and massive price fluctuations. The rise in Bitcoin price cannot guarantee a comprehensive increase in cryptocurrency prices.

Decentralization purists have reasons to feel threatened by TradFi (Traditional Finance) gaining prominence in the space they initially built. To them, large asset management companies and investment banks represent ideological enemies, fearing they may wield disproportionate influence or, worse, completely swallow up local cryptocurrency companies. The acquisition of TradFi (Traditional Finance) whales could wipe out all the progress made in cryptocurrencies and DeFi in recent years.

If the United States and the European Union adopt Bitcoin ETFs and balanced regulatory methods, cryptocurrencies (mainly DeFi) and TradFi (traditional finance) can coexist, as they serve different people with different services and products.

In addition to applying innovative financial solutions to digital and real-world assets, cryptocurrency companies can expand adoption by providing financial services to underserved populations, mainly in developing countries, where companies like BlackRock, Fidelity, and VanEck have a technological advantage in the financial field.

Furthermore, major institutions can help investors who are less familiar with the technical barriers required to directly participate in cryptocurrencies to easily access DeFi products, such as staking, lending, and borrowing.

Not long ago, TradFi (traditional finance) was threatened by the emerging cryptocurrency industry. However, this situation has reversed with the uncertainty of regulatory laws, potential Bitcoin ETFs, and increasing interest from TradFi.

But by leveraging their strengths, TradFi and native cryptocurrency companies can help build a stronger cryptocurrency ecosystem that can drive widespread adoption, regardless of whether the SEC approves the proposed ETF.

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