Bitcoin as a trading product is now being welcomed by the US market. Both institutional investors and retail transaction users in the United States have begun to buy Bitcoin. It's just that due to the different regulatory restrictions and transaction convenience, different user types use different methods to buy Bitcoin. For retail users, they can trade on encrypted digital currency exchanges in the existing US market. These exchanges are Coinbase and Kraken. They can also make purchases through third-party tools, such as Square and PayPal. For institutional users, due to the amount of funds they can use to purchase bitcoin and the restrictions on compliance, their ways to buy are more limited. This is why Grayscale Bitcoin Trust has a high premium and MicroStrategy stock has a substantial premium (see my article "What Does Bitcoin's Compliance Premium Predict?").
For US retail users, the existing way to buy Bitcoin is still not convenient. ETFs are products that are very conducive to ordinary investors in the US stock market. Therefore, if Bitcoin-based ETFs are listed for circulation, then more ordinary investors will participate in the buying and selling of Bitcoin.
Among the reasons for the SEC's rejection of Bitcoin ETF applications, the Bitcoin custody mechanism has been greatly improved. In addition to the existing fidelity and some existing dedicated encrypted digital asset custody companies, the Commonwealth Bank under the supervision of the OCC can also begin to provide bitcoin custody services. Therefore, for Bitcoin ETF custody, the solutions provided in the market should be able to meet regulatory requirements. The main problem now is that the bitcoin market transaction price is not manipulated. This should be the biggest challenge Gensler faced.
There are already Bitcoin-based trading products in the U.S. market
There are already trading of financial products based on Bitcoin in the US trading market. The market price of Bitcoin on which they are based is different. CME's Bitcoin futures are based on a composite index. This index is based on the Bitcoin transaction prices of five encrypted digital currency exchanges. These exchanges are Bitstamp, Coinbase, Gemini, itBit and Kraken. The price of Grayscale Bitcoin Trust Fund is based on the trading prices of four encrypted digital currency exchanges. The four exchanges are Kraken, Coinbase, LMAX Digital and Bitstamp. But the transaction price of Bitcoin is influenced by the prices of encrypted digital trading venues around the world. Therefore, whether it is the exchange on which CME's Bitcoin futures are based or the exchange on which the Grayscale Bitcoin Trust Fund is based, the spot trading volume of Bitcoin in these exchanges cannot completely determine the market price of Bitcoin. Therefore, even for the existing Bitcoin-based trading products in the US market, the underlying price basis is not so stable.
For Gensler, his choices in Bitcoin ETF application include: first approve the establishment of the Bitcoin ETF, and then implement a regulatory mechanism to thoroughly ensure that the spot transaction price of Bitcoin is not operated by the market; first, take regulatory measures to Ensure that Bitcoin spot transactions are not operated by the market, and then approve Bitcoin ETFs. It now appears that Gensler is more likely to adopt the first approach. This is because there are already products such as Bitcoin futures, Bitcoin options and Grayscale Trust Funds in circulation in the US securities market. Secondly, public investors in the United States are already directly buying Bitcoin spot on exchanges like Coinbase and Kraken, or through Square and PayPal. So in the US market, regardless of whether there is a Bitcoin ETF or not, mass investors have already bought and sold Bitcoin under existing market conditions. What the SEC can do is to implement regulatory measures as soon as possible after approving the establishment of a Bitcoin ETF to prevent the spot price of Bitcoin from being manipulated. If we look at it from another perspective, preventing the market price of trading products from being manipulated is a continuous task, rather than just getting it done once and for all after reaching a certain stage. So even if the current Bitcoin market is imperfect, it is still possible to launch an ETF based on Bitcoin. At the same time, in the process of market operation, constantly regulate the market and crack down on price manipulation in the market.
In view of the characteristics of global bitcoin transactions, in order to implement effective supervision of bitcoin, the US financial regulatory agency needs to cooperate with other financial regulatory agencies to formulate corresponding regulatory policies. I believe this is also the consensus of the world's major financial regulators. For example, recently European Central Bank President Lagarde once again raised the importance of cooperation with major global financial institutions in the supervision of Bitcoin (see my article "Interpretation of the European Central Bank President's Attitude and Impact on Bitcoin Supervision"). In fact, cooperation in this aspect of global financial supervision will not be limited to the supervision of Bitcoin. Due to the characteristics of the blockchain and the stablecoins and encrypted digital assets running on it, the future of encrypted digital finance must be carried out on a global scale. Therefore, the corresponding supervision must also be completed with the cooperation of global financial regulatory agencies. So for Gary Gensler, international cooperation in supervision will also be a major feature of his tenure.