Regulators Approve New Type of Bitcoin Fund, in Boon for Crypto Industry

Regulators Approve New Type of Bitcoin Fund, in Boon for Crypto Industry
Regulators Approve New Type of Bitcoin Fund, in Boon for Crypto Industry

Federal regulators on Wednesday approved a new financial product that tracks the price of Bitcoin, a landmark moment for the cryptocurrency industry that proponents hope will increase investment in the technology.

The Securities and Exchange Commission authorized 11 applications by financial firms to offer what are known as exchange-traded funds tied to Bitcoin, a potentially simpler way for people to invest in digital assets on traditional platforms like the Nasdaq. Some of the largest financial companies in the world, including the asset managers BlackRock and Fidelity, were approved to offer the products, known as E.T.F.s, which could begin trading as soon as Thursday.

The approval was hailed as a sign that mainstream financial institutions remain willing to use digital currencies even after 18 months of market crashes and high-profile bankruptcies. Since the fall, Bitcoin’s price has surged more than 60 percent, as traders bet that the S.E.C.’s backing of the new crypto products would give the industry an imprimatur of regulatory legitimacy, drawing fresh investment from professional wealth managers and amateur traders.

The price of Bitcoin shot up on Tuesday after a post appeared on the S.E.C.’s official X account announcing the approval of the E.T.F.s, but dropped swiftly when Gary Gensler, the S.E.C. chair, said the agency’s account had been hacked.

The industry had to wait only until Wednesday, when the S.E.C. authorized the products in a regulatory filing. The long-awaited announcement brings a pillar of the mainstream finance system into the experimental world of crypto.

Widely offered by financial firms like Charles Schwab and Vanguard, E.T.F.s are baskets of assets divided into shares that can be bought and sold on the open market — a form of investment popular among wealth managers who control trillions of dollars in capital.

Rather than storing Bitcoin in online wallets, investors in Bitcoin E.T.F.s would own shares in funds containing the digital currency. Investors would gain exposure to the crypto market without some of the risks and inconveniences historically associated with the technology.

“It creates a bridge to the traditional financial market,” said James Seyffart, a Bloomberg analyst who tracks E.T.F.s. “Long term, I think money’s going to come in.”

Crypto proponents had pushed for the introduction of a Bitcoin E.T.F. for years, hoping it would accelerate adoption of cryptocurrencies more broadly. In 2021, the S.E.C. approved funds that track the future price of Bitcoin without holding the currency itself. But the agency argued that a fund that contained Bitcoin would pose big risks to consumers, citing market manipulation in the crypto industry, among other issues.

Those arguments failed in court. In August, the S.E.C. lost a legal battle with the crypto asset manager Grayscale Investments, one of the firms that was applying to offer the product, clearing the path to a Bitcoin E.T.F.

Bitcoin’s price soon skyrocketed, reaching nearly $47,000, its highest value since a series of bankruptcies sent the industry into a meltdown in 2022. On social media, speculation raged about the timing of an approval by the S.E.C. The fake announcement on Tuesday prompted 15 minutes of celebration before Mr. Gensler intervened. An official X account for the platform’s safety resources said the agency had not enabled two-factor authentication, a common digital security tool, to protect its account.

Anticipation for the new crypto products had built for months. In November, BlackRock filed paperwork to create an E.T.F. tracking the price of Ether, the second-most-valuable cryptocurrency behind Bitcoin, prompting further excitement.

But skeptics argued that the new products wouldn’t solve any of the fundamental problems in crypto. Several major crypto firms declared bankruptcy in 2022, exposing the fragility of the digital asset industry. Critics argued that many of the firms weren’t offering much practical utility.

In a public letter last week, the nonprofit advocacy group Better Markets said the approval of Bitcoin E.T.F.s would be a “historic mistake almost certainly leading to massive investor harm.” Other analysts have argued that the products won’t provide much of a boost to crypto prices.

The growing prominence of companies like BlackRock in the crypto world also flies in the face of the renegade industry’s early promise to provide an alternative to mainstream financial behemoths.

“There’s so much irony and hypocrisy,” said John Stark, a former S.E.C. official and a longtime critic of crypto.

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Kyle C. Garrison

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