The first spot Bitcoin exchange-traded fund (ETF) application, filed in July 2013, was denied in both 2017 and 2018. A decade has passed since that initial application, and the Securities and Exchange Commission has rejected more than a dozen additional applications and repeatedly punted the date for deciding on others.
Those of us who witnessed the fallout up close know this. But investors who’ve been waiting on the sidelines for an ETF likely do not. It’s our job as industry builders and veterans to help newcomers understand the new degree of security and risk aversion that Bitcoin’s technology enables.
The downside of a spot Bitcoin ETF runs deeper than the conceptual contradiction and the unknowing purchases of a riskier investment. The potential cost for the crypto movement is immense.
Take, for example, BlackRock’s iShares Bitcoin Trust, the announcement of which drove Bitcoin’s price to a one-year high in June. However, perhaps blinded by the prospect of monumental institutional inflows, much of the Bitcoin community, myself included, has thrown its support behind BlackRock’s iteration of TradFi 2.0, haphazardly disguised as Bitcoin conviction.
Related: An ETF will bring a revolution for Bitcoin and other cryptocurrencies
Buried within BlackRock’s submission is a clause on hard forks. It states:
“The Sponsor will (…) use its discretion to determine which network should be considered the appropriate network for the Trust’s purposes, and in doing so may adversely affect the value of the Shares. (…) There is no guarantee that the Sponsor will choose the digital asset that is ultimately the most valuable fork. (…) The Sponsor may also disagree with Shareholders, the Bitcoin Custodian, other service providers, the Index Administrator, cryptocurrency exchanges, or other market participants on what is generally accepted as Bitcoin and should therefore be considered ‘bitcoin’ for the Trust’s purposes, which may also adversely affect the value of the Shares as a result.”
The above basically introduces ambiguity around the consensus mechanism for a protocol that already has a very well-defined and battle-tested mechanism.
On a broader level, BlackRock will undoubtedly amass an enormous Bitcoin supply, while its iShares ETF may be subject to opacity and possible rehypothecation. This puts shareholders at risk of having only a paper claim to Bitcoin that’s been lent out, instead of the asset itself. It’s one thing to have accepted this scenario pre-Bitcoin, but it’s deeply unsettling to imagine this becoming the norm in a world where we have the opportunity to own Bitcoin on a transparent and immutable ledger.
As the coexistence of decentralized finance and TradFi becomes more of a reality, it is inevitable that the SEC will, at some point, approve a spot Bitcoin ETF. While this isn’t innately bad, it’s critical for the Bitcoin community to remain cognizant and committed to the reasons we’re building a new financial system.
We can and should embrace legacy institutions’ adoption of Bitcoin and the undoubted intertwining of traditional investment vehicles and Bitcoin. But we also need to remain vigilant about the implications of developments like spot ETFs, help market newcomers understand the novelty of Bitcoin’s technology, and keep moving forward.
Joseph Kelly is the CEO of Unchained, a Bitcoin financial services company he co-founded in 2016. He’s a graduate of the Texas McCombs School of Business.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.