One approval and the dominoes will fall. That’s the dogma driving expectations for a U.S. spot Bitcoin exchange-traded fund (ETF). If only the industry’s bogeymen at the U.S. Securities and Exchange Commission (SEC) would approve that one application, approvals will snowball, institutional cash will flood in, and all will be right in the world of the blockchain.

That goal appeared to edge a step closer Monday. The SEC confirmed it will not contest a court decision in favor of digital asset investment firm Grayscale’s right to convert its GBTC (Grayscale Bitcoin Trust) into a spot Bitcoin ETF. Bitcoin was up over 19% for the past seven days on the back of the news, sitting above the US$34,000 support level as of 2.30 p.m. Wednesday in Hong Kong, according to CoinMarketCap data. The coin briefly broke US$35,000 during Tuesday trading, its highest level since May 2022.

A Grayscale spokesperson said that the company now hopes to “work constructively” with the SEC on its efforts to convert GBTC — currently the world’s largest cryptocurrency fund with US$16.7 billion in assets under management — into a spot Bitcoin ETF. “GBTC is operationally ready, and we intend to move as expeditiously as possible on behalf of our investors,” the spokesperson said.

But it’s not just Grayscale investors who are waiting for a U.S. spot Bitcoin ETF. The financial instrument — which would allow investors a way to invest in the coin on a traditional exchange — is seen as a way to open up the still marginal world of crypto investment to traditional finance.

“You’re going to have a lot of people getting into crypto by the way of an ETF,” said Jack Jia, head of crypto at payment platform Unlimit. He said the primary benefit of a spot Bitcoin ETF is that it improves the user experience (UX) for would-be crypto investors.

“They won’t need to use account abstraction or a custodial wallet because their UX is their broker,” Jia added. “They’re telling their customers or their clients to buy Bitcoin. So that is going to be the onboarding process, if you will.”

Other than Grayscale, a range of institutional investors, from BlackRock to Fidelity to Ark Invest, have applied to the SEC for permission to create a spot Bitcoin ETF in the U.S., the world’s largest economy. The SEC has so far either rejected or delayed making a decision on the applications, citing fears about a lack of liquidity and price manipulation in crypto markets.

But Vivian Fang, a FinTech expert and professor of finance at Indiana University, said she sees various signs that the SEC is now “warming up” to the idea of approving a spot Bitcoin ETF. She pointed to recent comments coming out of the regulator that it now considers the Bitcoin market to be of a sufficient size to resist market manipulation.

This, Fang said, has made her feel “cautiously optimistic” that the SEC will approve at least one spot Bitcoin ETF application by the end of this year.

Bullish behavior

According to research released Oct. 16 by blockchain data firm CryptoQuant, an SEC decision to allow the creation of spot Bitcoin ETFs by the seven largest asset managers with pending applications could bring up to US$155 billion into the Bitcoin market. Based on their analysis of the coin’s past bull run behavior, CryptoQuant calculated that would increase Bitcoin’s market capitalization by US$450 billion to US$900 billion, adding US$1 trillion to the wider crypto market along the way.

The crypto market has, over the past week in particular, shown a wholehearted desire to buy into that narrative. Crypto media picked up on a social media post Oct. 16 saying the SEC had approved BlackRock’s spot Bitcoin ETF application. The crypto market blew up. The price of Bitcoin soared nearly 10%, rising to around US$30,000 before falling back down to the US$28,000 range.

The news, it turned out, was fake. Regardless, there was around US$100 million in BTC liquidations in the first 30 minutes following the story. Cointelegraph, the media organization that first reported on the misleading post, issued a clarification statement apologizing for the error. But the damage — or the improvement, depending on which way you look at it — was done.

Whether or not the original post was a legitimate attempt to manipulate the market or simply a prank gone too far, the fake news attracted a flood of interest and mainstream media attention to the ongoing ETF discussion.

BlackRock Chief Executive Officer Larry Fink, once a vocal skeptic of the crypto industry, appeared on a Fox Business broadcast, saying that the Bitcoin price rally to US$30,000 was more than just investors buying the rumor. Rather, he said, it was “an example of pent-up interest in crypto” trading as a “flight to quality” during a time of geopolitical uncertainty.

On Monday, Oct. 23, as the market digested the likelihood the SEC would forgo an appeal on the Grayscale decision, an ETF analyst at Bloomberg Intelligence highlighted that BlackRock had listed its spot Bitcoin ETF on the Depository Trust and Clearing Corporation (DTCC) website.

A bullish sign that the ETF could soon see approval from the SEC, Bloomberg Intelligence ETF specialist Eric Balchunas posted to X (formally Twitter) that this was “another step in the process of launching.”

Road bumps

While the road ahead for one, if not multiple spot Bitcoin ETF approvals appears to be growing smoother, there are potential road bumps ahead. For Adam Berker, senior legal counsel at global payment platform Mercuryo, the principal obstacle remains the potential for lawsuits against the SEC.

“If the regulator were to accept the ongoing application from BlackRock, it may be criticized in the future over why it gave a green light for a large institutional player from the [traditional finance] sector while raising so much fuss over younger and smaller crypto projects,” Berker said via a note.

The past 18 months in the crypto industry have been characterized by corporate failures and capital flight resulting in a two-thirds drop off in the value of a once US$3 trillion industry. From the perspective of many crypto advocates, much of those losses were caused by increased scrutiny and so-called “regulation by enforcement” from the SEC and fellow regulator the Commodity Futures Trading Commission (CFTC).

The two regulators have sued a number of crypto firms throughout that period, including cryptocurrency exchanges Binance and Coinbase, alongside blockchain software firm Ripple. They have also prevented some cryptocurrency-related financial products such as a spot Bitcoin ETF from taking off. Finance professor Fang described the spate of lawsuits as part of an ongoing “turf war” between the two regulators as to who gets to regulate the crypto industry in future.

The lack of clarity on that issue, Fang said, adds to a number of other uncertainties hanging over crypto and potentially hampering the creation of a spot Bitcoin ETF. Chief among those is the question of whether or not cryptocurrencies are securities.

“If they are, then the SEC must regulate them as it regulates stocks and bonds, but I am not sure the SEC can or has resources to (even if it wants to),” Fang wrote in an email. “For example, can the SEC demand all investors of Bitcoin be registered (the KYC rule)?”

With regulators unwilling to adopt a particular position on those issues, Fang added, the prospect of a spot Bitcoin ETF appears less like a silver bullet for the crypto industry and more like a stop-gap measure as the different regulators get their houses in order.

“I view a spot Bitcoin ETF as a bone that the SEC is willing to throw to the industry after taking a tough stance against many crypto exchanges,” Fang said.