When will regulators loosen their grip as Bitcoin ETFs attract over 20 billion

News Report:


Reporter Zhao Yi from China Times (chinatimes.net.cn) – Shanghai
As the cryptocurrency market continues to develop, investors are seeking new investment tools to participate in it.
Data shows that the total net inflow of spot Bitcoin ETFs exceeded $20 billion for the first time on October 17, while it took about 5 years for gold ETFs to reach the same number. With the strong “money-sucking” power of Bitcoin ETFs, institutions have started to shift their focus to other cryptocurrency ETFs.
On October 17, asset management company Bitwise submitted the registration file for XRP ETF to the U.S. Securities and Exchange Commission (SEC). The day before, asset management company Canary Capital also submitted a registration statement to the SEC, planning to launch the first spot Litecoin (LTC) ETF. Prior to this, VanEck and 21Shares had successively submitted application documents for Solana ETF to the SEC.
“Institutions are submitting more ETF applications for different cryptocurrencies, aiming to capture the growth opportunities of these emerging assets and further meet the market’s demand for innovative financial products,” said Yu Jia Ning, co-chair of the Blockchain Committee of the China Communications Industry Association, to a reporter from China Times. From the perspective of the diversified needs of the financial market, investors are no longer satisfied with holding mainstream cryptocurrencies such as Bitcoin and Ethereum. More investors hope to use cryptocurrency ETFs as compliant tools to obtain more diversified asset allocation opportunities.
Institutions Target ETFs Collectively
Bitcoin spot ETFs have been highly sought after since their inception. According to data from the blockchain data analysis platform CryptoQuant, due to continuous capital inflows, the asset under management (AUM) of Bitcoin spot ETFs in the United States has reached $60 billion.
According to data from independent research and consulting firm ETFGI, as of the end of August 2024, the global ETF market has experienced rapid growth, with a large amount of assets accumulated by newly listed ETFs this year. Among these newly listed products, the top three in terms of size are all Bitcoin spot ETFs. Among the top ten products, Bitcoin spot ETFs occupy five seats, demonstrating strong money-sucking power and growth momentum.
In this context, institutions have begun to layout other cryptocurrency ETFs, and who will become the next ETF product after Bitcoin and Ethereum has become a topic of industry concern.
Canary Capital, which applied for the Litecoin ETF, believes that Litecoin has a good performance record and has maintained 100% normal operation since its launch, which will be beneficial to the management of the Litecoin ETF.
Litecoin was created in 2011 as a lightweight alternative to Bitcoin. It has improved based on the open-source code of Bitcoin to achieve faster transaction speed and lower cost. Previously, the U.S. Commodity Futures Trading Commission (CFTC) defined Litecoin as a commodity, not a security, in a complaint against KuCoin, which may have a positive impact on the review of the Litecoin ETF.
In addition to the Litecoin ETF application, Canary Capital has also submitted an application for XRP ETF recently. However, there is still a dispute about whether XRP will be defined as a commodity or a security.
“The cryptocurrency market is constantly developing and diversifying, and investors have shown more interest and demand for different types of cryptocurrencies,” said Jiang Han, a senior researcher at Pangu Think Tank, to a reporter from China Times. The applications from institutions reflect their optimism about the cryptocurrency ETF market. On the other hand, this also helps promote the further standardization and legalization of the cryptocurrency market, improving market transparency and fairness.
Recently, cryptocurrency asset management company Grayscale also submitted an application to the SEC, planning to convert its $520 million fund tracking multiple cryptocurrencies into an exchange-traded fund (ETF), with 76% of the fund’s assets allocated to Bitcoin, 18% to Ethereum, and the remaining portion to Solana, XRP, and Avalanche.
Previously, the SEC approved Grayscale’s request to convert its Bitcoin Trust (GBTC) and Ethereum Trust (ETHE) into ETFs. Since its conversion into an ETF in January, the company’s Bitcoin fund has seen $21 billion in outflows, while the Ethereum ETF has seen $3 billion in outflows since its conversion in July.
“If these applications are approved, it will further consolidate the mainstream status of cryptocurrency assets and drive more traditional investors into the market,” said Yu Jia Ning. Institutional investors can invest in cryptocurrency assets through compliant and secure channels, which will significantly enhance market liquidity and reduce the price volatility of cryptocurrency assets. At the same time, with the popularization of ETF products, the correlation between the traditional financial market and the cryptocurrency market will strengthen, and the volatility of cryptocurrency assets may have closer ties to global macroeconomic policies and monetary policies.
Yu Jia Ning pointed out that the wide launch of cryptocurrency ETFs may bring certain risks, especially in terms of market manipulation and systemic risks control. With the rapid inflow and outflow of large amounts of funds, the market may face liquidity shocks in extreme market conditions, especially in situations with high macroeconomic uncertainty. Therefore, regulatory agencies will continue to maintain strict monitoring of market operations and risk management in the future.
Regulations as the Biggest “Obstacle”
The attitude of regulatory agencies towards the cryptocurrency market is a key factor affecting the development of ETFs.
“Although the U.S. SEC is open to Bitcoin and Ethereum spot ETFs, ETF applications for other cryptocurrencies still face many challenges,” Yu Jia Ning believes that this is mainly due to the inherent volatility and manipulability of the cryptocurrency market. Assets such as Litecoin and Solana have relatively lower market maturity and liquidity compared to Bitcoin and Ethereum, making them susceptible to the influence of single events or investor sentiment.
“When SEC reviews these cryptocurrency ETFs, it will inevitably strengthen its examination of market manipulation, asset custody security, and transparency. Therefore, when institutions apply for such products, they need to fully demonstrate that they have sufficient market liquidity and secure trading mechanisms to obtain regulatory approval,” said Yu Jia Ning.
On October 18, the SEC formally appealed the XRP ruling made by the court, once again sparking legal disputes over whether the XRP sales of cryptocurrency exchanges meet the conditions for securities. Regulatory agencies have raised questions about key aspects of the court ruling, including the clearing of Ripple executives and non-cash XRP distribution.
Recently, the SEC once again postponed its decision on the options for Ethereum spot ETFs, extending the deadline for the ruling from October 19 to December 3. The SEC stated that it needs more time to consider the application proposal. Compared to Bitcoin ETFs, the performance of Ethereum ETFs after listing has been disappointing, with continuous net outflows totaling $556 million to date.
Yu Jia Ning believes that the main concerns of regulatory agencies in rejecting applications are concentrated in three areas: market manipulation risks, insufficient liquidity, and custody security. Compared to traditional financial markets, the cryptocurrency market still has higher volatility, and market transparency and price control issues are more prominent. The high level of attention paid by regulatory agencies such as the U.S. SEC to market manipulation, especially for cryptocurrencies with smaller market capitalization than Bitcoin or Ethereum, lower liquidity, and potential market manipulation behavior, will be an important reason hindering the approval of ETF applications.
According to the latest report, U.S. regulatory agencies have collected a total of $31.92 billion (approximately RMB 227.26 billion) in fines and settlements from 25 cryptocurrency companies since 2019, demonstrating the high level of attention paid by regulatory agencies to the risks of the cryptocurrency market.
As of now, U.S. regulatory agencies have reached 8 settlements with cryptocurrency companies in 2024, collecting fines and settlements totaling over $19 billion (approximately RMB 135.27 billion). This figure sets a new record, with an increase of 78% compared to 2023 and an increase of 8,327% compared to 2022.
In response, Yu Jia Ning believes that the attitude of the U.S. SEC towards the cryptocurrency market can be seen as a pragmatic balance between compliance and regulation. The frequent enforcement actions by the SEC are not only targeting individual companies or projects but reflect its overall regulatory logic, that is, it hopes to regulate the industry and prevent market abuse and harm to investors.
“In the long run, regulatory trends will move towards institutionalization and refinement,” Yu Jia Ning believes that future global cryptocurrency regulation will gradually converge, and major economies including the United States may provide more explicit legal frameworks for cryptocurrencies through legislation or executive orders. For example, more inclusive regulations may be introduced to allow more compliant enterprises to enter the market, while setting standards for cryptocurrency exchanges, custodians, and DeFi platforms. This means that companies that proactively comply with strict compliance operations will have greater room for development, especially those willing to cooperate with regulations and enhance transparency, making it easier to win the favor of institutional investors.
In Jiang Han’s view, the strict regulation of cryptocurrency institutions by the SEC reflects its emphasis on protecting investors’ interests and maintaining market stability. Through lawsuits and the collection of fines, the SEC is strengthening its regulatory efforts in the cryptocurrency market. Future regulatory trends may become stricter and more comprehensive, and regulation of areas such as cryptocurrency exchanges, wallets, and ICOs may be further strengthened. At the same time, regulatory policies may continue to be adjusted and improved as the market evolves.
Editor: Xu Yunqian Chief Editor: Gong Peijia