This Week in Policy (7/6)
Hola entusiastas de fintech!
When you do magic, whether you are Cinderella’s fairy godmother or France, it should all end by midnight. Before the end of its presidency of the European Council on June 30 at midnight, France worked its magic by getting the European Parliament, Council, and Commission to approve a draft of the first continental crypto regulation ever. The Markets in Crypto Assets (MiCA) draft regulation is very comprehensive, addressing not only crypto-assets but also stablecoins, trading venues, and digital wallets. The finalized draft of MiCA has not yet been made public, and it is not entirely clear the extent to which it is similar or different from the earlier version that was leaked in September 2020. Regardless, similar to our deep dive into the Lummis-Gillibrand draft bill, it will definitely be worthwhile to break down what we know about MiCA in next week’s post.
Can you think of some of the motivations for the EU’s approval of MiCA, other than the magic of France’s presidency of the European Council?
Now, let’s leave the Old Continent and go to the U.S. where Grayscale, the manager of the world’s largest Bitcoin fund, announced last week that it will sue the Securities and Exchange Commission (SEC) for rejecting its application to convert the $13.5 billion Grayscale Bitcoin Trust into a spot Bitcoin exchange-traded fund (ETF). The SEC’s decision cited Grayscale’s failure to respond to the SEC's questions about market manipulation. “The SEC is acting arbitrary and capricious by continuing to approve Bitcoin futures-based ETFs while continuing to deny spot Bitcoin ETFs,” Michael Sonnenshein, the CEO of Grayscale, told CNBC.
Ok, but wait a second, what is the difference between a Bitcoin futures ETF and a spot Bitcoin ETF, in plain language, please? Well, let’s start by what an ETF is. An ETF is a pooled investment security (think of a fund that is comprised of many shares) that allows investors to gain exposure to (i.e., invest in) a certain asset via the stock market, without directly buying or selling that asset. ETFs can track the spot (i.e., current) or future price or value of a certain index, sector, commodity, digital asset, or any other asset. And because they are traded on stock markets, they are called “exchange-traded” funds. So, a Bitcoin ETF is an ETF that allows investors to gain exposure to Bitcoin via stock markets rather than a cryptocurrency exchange (where cryptocurrency is usually traded), which makes this type of trading accessible to a wider range of investors that are not active users of cryptocurrency exchanges.
The difference between a Bitcoin futures ETF and a spot Bitcoin ETF is that the former allows investors to trade in Bitcoin futures, which are agreements to buy or sell Bitcoin at a certain price on a future date, whereas the latter allows investors to invest directly in Bitcoin. In February 2021, Canada became the first country in the world to approve a Bitcoin ETF that settles directly in Bitcoin, not Bitcoin futures. The U.S. kind of followed suit. In October 2021, the SEC approved the first Bitcoin futures ETF. On the contrary, the SEC has consistently rejected applications for spot Bitcoin ETFs, arguing that, unlike Bitcoin futures which could be issued and controlled by a U.S.-regulated ETF, trading directly in Bitcoin is less safe because it is decentralized, unregulated, and more amenable to manipulation. What does that mean in practical terms? A significant limitation on who can trade in Bitcoin and the like. So, unless you have a digital wallet with a cryptocurrency exchange or a platform like Robinhood, you will not be able to invest directly in major cryptocurrencies for the foreseeable future.
To what extent do you find the SEC’s rationales convincing? How does the Lummis-Gillibrand draft bill intervene in this debate? Hint: think about the regulator to which the bill grants “exclusive spot market jurisdiction” over Bitcoin and Ether.
See you next week!