Understanding the hold-up on spot bitcoin ETF options approval

The Securities and Exchange Commission is not ready to approve options for spot bitcoin ETFs — a move some say is questionable even considering that multiple regulators are involved.

An option is a contract representing the right to buy or sell a financial product, like stocks or ETFs, at a certain price for a specific period of time.

Industry watchers have said such derivatives on spot bitcoin ETFs could be particularly appealing to institutional investors looking to hedge their downside risk in the funds, whether they’re long or short the funds.

But the SEC has not yet greenlit options for the spot bitcoin ETFs — funds the regulator approved in January. It noted in a Monday filing that it “finds it appropriate to designate a longer period within which to take action on the proposed rule change.”

This was a response to the New York Stock Exchange’s proposal to list and trade options for the Grayscale Bitcoin Trust ETF (GBTC) and the Bitwise Bitcoin ETF (BITB), and applies to “any trust that holds bitcoin,” the disclosure notes.

A spokesperson for NYSE declined to comment.

Multiple regulators involved…but still

The Cboe Options Exchange proposed on Jan. 5 to list options on bitcoin ETFs — about a week before the regulator officially greenlit such ETFs. NYSE and Nasdaq followed suit days later.

Though Cboe’s rules generally permit it to list options on ETPs three days after they start trading, they don’t apply to such products holding commodities like BTC, the company said in a filing. The SEC delayed its decision on the Cboe proposal last month.

Given that bitcoin is classified as a commodity, it is also regulated by the Commodity Futures Trading Commission, said CK Zheng, co-founder of crypto hedge fund ZX Squared Capital.

“It usually takes a longer period of time to approve an innovative financial product when both CFTC and SEC are involved,” he told Blockworks.

It took several years for the SEC and CFTC to allow futures and option contracts based on shares of State Street Global Advisors’ SPDR Gold Trust (GLD), for example. Though the trust launched in 2004, such derivatives linked to GLD didn’t come until 2008.

“Given the crypto market is rather new and extremely volatile, it’s not too surprising to see the SEC take a more cautious approach to handle the approval process,” Zheng added.

Still, Bryan Armour, a director of passive strategies research at Morningstar, called the SEC’s delay on approving options on these funds “a head-scratcher.”

“I’m not sure why the SEC is taking so long to review these rule changes,” he told Blockworks. “They already approved options for bitcoin futures ETFs, even leveraged ones like BITX. I can’t see why they would deny options for spot bitcoin ETFs.”

Nate Geraci, president of The ETF Store, said the optics around the delays are “rather poor” given that options for futures-based bitcoin ETFs exist.

“It’s difficult to reconcile why options wouldn’t exist on the spot products,” he said. “Options would contribute to a more robust ecosystem around the spot ETFs, which enhances liquidity and price discovery — a clear benefit to investors.”

Grayscale Investments pointed out the SEC’s quick approval of options on bitcoin futures ETFs in a blog post last month. Because spot commodity products like GBTC are registered under the Securities Act of 1933, they must receive individual review and approval from the SEC, the company wrote.

When the SEC approved options for GLD in 2008, its decision was limited solely to those shares.

“We believe the commission should update this outdated approach to approve options on spot commodity-based ETPs that are structured identically to already-approved ETPs,” Grayscale added at the time.

Grayscale CEO Michael Sonnenshein said during a panel at Blockworks’ Digital Asset Summit in London last month that the process of getting spot bitcoin ETF options approved comes amid “a regulatory holding pattern.”

“But we do think this could be very, very meaningful for the further adoption and maturation of spot bitcoin ETFs and users,” Sonnenshein noted. “It could help lead to price discovery, it could help investors manage their positions better and it could also actually lead to additional product creation.”

Spokespeople for Grayscale and Bitwise did not immediately return a request for comment about the latest delay.

When could spot bitcoin ETF options approval come?

The SEC said it would next rule on, or postpone its decision on, Cboe’s proposal to list and trade spot bitcoin ETF options by April 24.

In the latest filing published Monday, the SEC said it would “approve or disapprove, or institute proceedings to determine whether to disapprove” the New York Stock Exchange proposal by May 29.

Sonnenshein recognized during the Digital Asset Summit discussion that getting such options cleared was likely to take more time.

“There will be careful consideration on the listed options between the SEC, the CFTC and the Options Clearing Corp,” the Grayscale CEO said. “That is something that I hope will occur by [the third quarter] at the latest this year, and can really be an important catalyst.”

A “healthy” bitcoin ETF options market will quicken bitcoin adoption, especially in the traditional finance world, Zheng said.

He added: “I hope the approval process can be completed before the year’s end at the latest, as there are no fundamental issues related to the underlying commodity or its option product.”

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