Why is the cryptocurrency community generally negative about applying for a Bitcoin ETF under the supervision of BlackRock?

Why is the cryptocurrency community against a BlackRock-regulated Bitcoin ETF?

Many people did not see BlackRock’s Bitcoin ETF application as a positive signal for countering regulatory pressure.

Author: Jaleel, Jack

This morning, BlackRock, one of the world’s largest asset management groups, submitted a filing with the U.S. SEC for a spot Bitcoin ETF through its subsidiary iShares, which has attracted high attention in the English-speaking community. According to the filing, the ETF is named “iShares Bitcoin Trust” and its assets are mainly composed of Bitcoin held by the trustee representing the trust, with the “trustee” being managed through the cryptocurrency trading platform Coinbase.

In the context of the recent huge regulatory pressure from the SEC and the fact that many spot Bitcoin ETFs have not been approved, the Bitcoin ETF application of the world’s largest asset management giant is very surprising. Variant Fund Advisor and practicing lawyer Jake Chervinsky (@jchervinsky) wrote on Twitter: “The SEC has been resolutely refusing to approve spot Bitcoin ETFs for years, and this attitude has been deeply rooted. Knowing that the SEC is negative about this, BlackRock still hopes to list Bitcoin ETFs on Nasdaq. We should all know how important this is, right?”

As an asset management company with assets under management of more than US$10 trillion, BlackRock manages assets far exceeding Japan’s GDP of US$4.97 trillion in 2018. BlackRock, Vanguard Group, and Deutsche Bank were once known as the “three giants” and controlled the entire index fund industry in the United States. Therefore, BlackRock’s submission of a spot Bitcoin ETF filing to the U.S. SEC has caused a lot of discussion in the community.

BlackRock applies for Bitcoin ETF, crypto community reacts negatively

Although BlackRock’s spot ETF application is a huge positive for the industry, some cryptocurrency practitioners do not seem to support BlackRock’s application for a spot Bitcoin ETF. According to the rules of Bitcoin spot ETFs, the fund company is responsible for buying, selling, and storing physical Bitcoins and creating corresponding ETF shares for trading on stock exchanges. Therefore, Bitcoin ETFs are only assets that track the price of Bitcoin, and investors who purchase Bitcoin ETFs indirectly invest in Bitcoin, owning tradable Bitcoin fund shares rather than directly holding Bitcoin. This violates the spirit of cryptocurrency to some extent: “Your keys, your bitcoin. Not your keys, not your bitcoin.”

BlockBeats found that for BlackRock’s “contrarian operation” to resist regulatory pressure, most English-speaking communities did not see BlackRock’s Bitcoin ETF application as a positive signal. In the comments on Twitter about the Bitcoin ETF application, words such as “traditional financial giants,” “financial elites,” and even “operation chokepoint 2.0” frequently appeared.

Well-known KOL AutismCapital (@AutismCapital) believes that BlackRock’s choice to launch an ETF under the regulatory pressure of the U.S. Securities and Exchange Commission (SEC) probably means that the SEC is conducting a cleanup operation. The aim is to clear out the “low-level scammers” in the cryptocurrency field, to make it easier for America’s traditional financial “elite giants” to rebuild a game platform according to their own rules.

Hsaka (@HsakaTrades) listed several events in which traditional financial giants entered the cryptocurrency industry, implying BlackRock’s Bitcoin ETF application’s “crocodile finance” attributes:

-BlackRock’s application for a physical Bitcoin ETF;

-Soros Fund Management stated that the timing of TardFi’s acquisition of cryptocurrency is ripe;

-EDX, a cryptocurrency exchange supported by Citadel, is rumored to go online later this year;

Previously, Dawn FitzBlockingtrick, CEO of Soros Fund Management, spoke at the Bloomberg Investment Summit, saying that the time has come for traditional finance (TradFi) to acquire cryptocurrency technology. Dawn FitzBlockingtrick said that cryptocurrencies will continue to exist, and that it is a huge opportunity for existing traditional financial companies to lead the industry. In addition, financial giants such as Citadel Securities, Charles Schwab, and Fidelity Digital Assets announced the launch of the cryptocurrency exchange EDX Markets, which many believe is the latest evidence of Wall Street’s progress in digital assets during the crypto winter.

Scimitar Capital partner thiccy (@thiccythot_) pointed out that the U.S. Securities and Exchange Commission has approved quite a few Bitcoin futures ETFs, but not physical ETFs. The assets under management of physical ETFs traded on the U.S. stock market are very small. In thiccy’s view, physical ETFs are “garbage,” and the U.S. Securities and Exchange Commission has long denied physical ETFs, citing concerns about market manipulation and a lack of supervision-sharing agreements between the “massive regulated market” and regulated exchanges. “This concern is somewhat reasonable because Coinbase and other U.S. exchanges account for less than 10% of Bitcoin spot trading volume,” thiccy wrote in a tweet.

Bloomberg’s senior ETF analyst Eric Balchunas (@EricBalchunas) believes there is no sign the SEC will approve the application, but given the close relationship between BlackRock and them, perhaps BlackRock knows something? Another interesting point is that Coinbase’s victory in obtaining custody rights could be lost if the spot ETF is approved, as it will relieve customers and trading costs. Think about why I should pay Coinbase 40-100 basis points per transaction when the ETF is one basis point?

Will the real regular army enter?

BlackRock’s application for a spot bitcoin ETF was not without warning. As early as the beginning of 2021, BlackRock CEO Larry Fink publicly stated that he was “bullish on bitcoin becoming a global market asset,” and Rick Rieder, the company’s chief investment officer for fixed income, subsequently stated that BlackRock had begun to dabble in bitcoin.

That same year, BlackRock said its global allocation fund had gained some bitcoin exposure through CME bitcoin futures issuance. BlackRock’s two fund companies, “BlackRock Global Allocation Fund” and “BlackRock Funds V,” stated in the investment prospectus (497 Prospectus) submitted to the US Securities and Exchange Commission that some of its funds can participate in Bitcoin futures contract trading. The investment prospectus also stated that not all Bitcoin futures contracts are eligible for investment, but rather Bitcoin futures registered with the US Commodity Futures Trading Commission (CFTC) and settled in cash.

Source: BlackRock Funds V 497 Prospectus

Interestingly, in addition to being well-experienced in gaining bitcoin exposure, BlackRock’s collaboration with Coinbase is not the first time.

BlackRock’s past collaborations with the “cryptocurrency regular army”: Coinbase and Circle

On August 4, 2022, BlackRock announced an agreement with cryptocurrency exchange Coinbase to offer cryptocurrencies to institutional investors, starting with Bitcoin. According to Coinbase’s blog post, BlackRock will use Coinbase Prime to offer the service, which will enable its Aladdin institutional clients to gain access to cryptocurrency trading, custody, principal brokerage, and reporting capabilities.

On August 11th of the same year, BlackRock launched a private trust to provide US institutional clients with spot bitcoin exposure. The trust will be available to US institutional clients and will become BlackRock’s first product to directly expose bitcoin prices. BlackRock said in a statement: “Despite the sharp decline in the digital asset market, we still see some institutional clients showing strong interest in how to efficiently and economically obtain these assets using our technology and product capabilities.”

On the Circle side of USDC, BlackRock participated in Circle’s $400 million financing round in the second quarter of 2022, and Circle invested most of its reserve funds in the “Circle Reserve Fund” government currency market fund managed by BlackRock. As of the time of writing, according to BlackRock and Circle’s official pages, the asset size of the Circle Reserve Fund has reached US$24.787 billion, accounting for approximately 86% of the total reserve funds of Circle ($28.5 billion), and the remaining funds will be temporarily held as bank deposits.

In January of this year, the well-known financial think tank, the Bank Policy Institute (BPI), also released a research article pointing out that USDC may become a “backdoor central bank digital currency” with the help of BlackRock. The research found that BlackRock has planned to apply for permission to allow the fund to use the Federal Reserve’s overnight reverse repurchase agreement facility (ON RRP). Once approved, this means that anyone who wants to hold an equivalent reserve of US dollars with the Federal Reserve can do so by purchasing USDC, and USDC will therefore become a “Backdoor CBDC”, and anyone in the world can use USDC to conduct ON RRP in the Federal Reserve system.

Previously, BlockBeats reported that the trading pair used by both sellers and arbitrageurs in the FUD encountered by USDT in Curve 3pool was USDC. (Related reading: “USDT faces serious selling pressure, are market makers exiting?”)

Operation Chokepoint 2.0

In the discussion about BlackRock’s spot ETF application, another popular view in the community is “Operation Chokepoint 2.0”. Well-known KOL and serial entrepreneur Andrew (@AP_Abacus) pointed out the subtle timing of BlackRock’s ETF application in his own tweet:

– The US Securities and Exchange Commission has sued four major cryptocurrency trading platforms, including Gemini, Coinbase, Binance US, and Kraken. This means they may be investigated for allegedly violating US securities trading regulations.

– Meanwhile, the Fed has shut down two well-known banks, Silvergate Bank and Signature Bank, that provide services to the cryptocurrency industry.

– The Fed is also deciding whether to approve requests from cryptocurrency-friendly banks Custodia Bank and Protego Trust.

– At this time, BlackRock has started applying for a Bitcoin ETF.

Since February this year, rumors about the United States authorities strengthening supervision have been increasing. First, Coinbase CEO Brian Armstrong revealed that there are rumors that the US SEC may ban cryptocurrency pledge services for retail investors. Then, multiple sources said that the Fed and financial regulators are taking massive action, putting pressure on banks to prevent cryptocurrency enterprises from getting bank accounts and cutting off the connection between cryptocurrency and banks.

In March, several US banks were forced to liquidate. After the fact, it was discovered that several banks that were liquidated, including Signature Bank, Silicon Valley Bank, and Silvergate Bank, were all cryptocurrency-friendly banks. A large part of Signature Bank’s daily business is related to the cryptocurrency industry. Many people believe that the Biden administration is now carrying out a coordinated plan that appears to be across multiple agencies to block the funding channels between banks and cryptocurrency companies, and this trend is called “Operation Choke Point 2.0.”

The term “Operation Choke Point 2.0” comes from a plan launched by the US Department of Justice (DOJ) in 2013 to combat fraud and illegal activities such as money laundering and drug trafficking. The US government puts pressure on banks that do business with high-risk merchants to prevent certain companies from obtaining financial services. The measure was controversial at the time because it led to severe liquidity crises for many legal but politically unpopular businesses considered high-risk, and it was also seen as an Obama-era movement to cancel legal but politically unpopular banking operations.

After the bankruptcy of several crypto-friendly banks, it seems that US crypto companies are becoming “homeless” in terms of banking services. According to CoinDesk, most banks remain silent on this issue, and some banks have explicitly stated that they are unwilling to accept crypto customers. (Related reading: “The US launches a ‘whole-of-government’ crackdown on the crypto industry, and crypto resources are escaping?”)

Will Clemente, co-founder of digital asset research company ReflexivityRes, tweeted on Twitter that if BlackRock’s spot ETF application is approved, then “Operation Choke Point 2.0” is likely to be carefully planned. The purpose is to drive out native crypto companies and introduce large traditional companies that partner with the US government in an attempt to control Bitcoin and cryptocurrencies.

Of course, these views are unilateral speculations of the community, and there is no official document as actual evidence.

Can BlackRock’s spot ETF application be approved?

Another topic that has sparked community discussion is whether BlackRock’s Bitcoin ETF can be approved. Previously, the SEC approved some futures-based Bitcoin ETFs, but has never approved attempts to open spot Bitcoin ETFs, including Jacobi Asset Management, Bitwise, Valkyrie, Kryptoin, SkyBridge, NYDIG, GlobalX Digital Assets, One River, WisdomTree, etc.

In April of last year, Ark Investment Management, owned by Cathie Wood, and Swiss investment product provider 21Shares tried to list a bitcoin spot ETF in the United States, but were rejected. Subsequently, the two companies resubmitted an application in May, and were rejected for the second time. The reason for the rejection was that “the Cboe BZX Exchange, which plans to list this ETF, failed to prove that its proposal meets the SEC’s requirements to prevent fraud and other malicious behavior.”

Image source: @thiccythot_

In October 2021, Grayscale also submitted a 19b-4 document to the US SEC to apply for a bitcoin spot ETF, hoping to convert GBTC into a bitcoin spot ETF, but it was also rejected. SEC Commissioner Mark Uyeda once said during the Singapore ICI Global Asset Management Asia Forum: “So far, we have received many applications that have not been approved.” Uyeda said that SEC will consider these applications based on their “actual situation.”

After Grayscale’s grayscale application was rejected, it even argued with the SEC in the Columbia District Court. The SEC believes that Bitcoin futures ETFs are more resistant to manipulation than the spot market, and uses this as one of the reasons for rejecting Grayscale’s spot ETF application. Judge Rao questioned this: “The SEC needs to explain how it understands the relationship between Bitcoin futures and spot prices. A futures is essentially a derivative. They are together 99.9% of the time. What is the difference between the two in the eyes of the SEC?” The SEC also argued that “99% correlation does not equal causation, futures data only refers to the price once a day, not the intraday price. In the eyes of the SEC, the Bitcoin spot market is undeniably decentralized and sharply contrasts with Bitcoin futures traded only on the Chicago Mercantile Exchange (CME).”

So far, the SEC has not approved any Bitcoin spot exchange-traded funds (ETFs) for listing. Therefore, VanEck CEO Jan believes that investors are unlikely to see Bitcoin spot ETFs in the United States soon, and perhaps will not be listed in the United States in the next year and a half. Interestingly, the founder and CEO of CustodiaBank also initiated a vote:

If the Belaid Bitcoin spot ETF application is approved, what do you think of the US government?

1. Corrupt;

2. Diligent and problem-free

Among them, more than 80% of voters believe that if the application for this ETF is approved, it will further reflect the corruption of US authoritative departments.

On the issue of “whether BlackRock’s application will be approved”, Scimitar Capital partner thiccy (@thiccythot_) believes that as the largest and most respected asset management company, BlackRock may establish a special relationship with the SEC. In addition, the pressure from the Republican Party on Gensler is increasing, and the SEC may make some arbitrary decisions. In thiccy’s view, if BlackRock’s ETF is approved, it will be a huge driving force for the crypto industry.

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