On January 10, the U.S. Securities Exchange Commission (SEC) approved the first Bitcoin spot exchange traded funds (ETFs). Although trading instruments for crypto have existed prior, they have so far been limited to derivatives, such as Bitcoin futures which were first approved in October 2021. This highly anticipated decision means that it is now possible for investors to get effective exposure to Bitcoin directly, without needing to go through the steps of owning the asset itself through self-custody, relying on derivative products, purchasing equity in mining companies, or owning funds with some indirect exposure.
The SEC's approval signals a shift in the financial services industry. It paves the way for mainstream and institutional investors, including pension funds, to invest in Bitcoin without needing to grapple with the underlying technologies. This inclusion into the traditional investment portfolio represents a significant step towards the normalization and legitimacy of Bitcoin and potentially digital assets more broadly. However, whether this approval just marks an opportunistic move for commercial firms or an actual shift in perspectives on the technology has yet to be seen.
Some will view the ETF approval not just as a new investment vehicle but a stepping stone towards a recognition of the extensive digital transformation in finance that is underway. The concept of tokenization, where all asset classes—from cash to securities—are converted into digital tokens, could revolutionize capital markets, cross-border payments and trustless financial services. For fintech and digital asset companies, this may present an excellent opportunity to seize the momentum and build the infrastructure and systems for that broader adoption.
Despite the excitement, the journey for cryptocurrencies has not been without its pitfalls. High-profile scams and hacks have marred its reputation and those companies operating in this field will need to be wary of cybersecurity threats. Regulatory challenges remain significant as authorities strive to balance innovation with investor protection and financial stability. Financial institutions venturing into this space must navigate these challenges carefully, emphasizing the importance of robust risk management, compliance and disaster recovery.
It's unclear how this shift will reverberate across other jurisdictions. Other jurisdictions have already permitted spot ETFs, with the first spot Bitcoin ETF launching in Canada in February 2021, and the first in the EU launching last summer. However, Bitcoin ETFs are not currently authorized by the FCA, the UK’s regulator, and this is not currently expected to change in the immediate future (the most recent change to crypto regulation in the UK being the introduction of more stringent marketing rules). With the UK government keen to make the country a crypto hub, time will tell whether the FCA will alter its approach.
Although the SEC’s approval of Bitcoin ETFs is a big moment for the industry, it’s still only a small step along the path for financial services disruption. It’s worth noting that Gensler has differentiated Bitcoin “and everything [else]” in crypto. We offer an additional consideration: that the underlying technology itself should be thought of separately from the ups and downs of arbitrary crypto tokens. This is in line with comments from Larry Fink, CEO of BlackRock, regarding the promise of tokenization, which would ultimately use some version of decentralized ledger technology.
At AlixPartners, we see many of our clients actively engaged in these areas, pushing the boundaries of innovation, while working in good faith with regulators, counsel, customers, and vendors to build the future of finance. Leveraging our cross-industry expertise and “operator mindset”, we offer valuable support for clients seeking guidance in these disruptive times, such as enhancing compliance programs, designing digital products, or identifying new business opportunities. The digital asset industry may come with its own challenges, but we are excited to help build the future with the help of regulators and industry participants alike.