The race for an exchange-traded fund (ETF) based on bitcoin is heating up despite multiple delays from federal regulators that are reluctant to bring together one of the most popular financial products with the leading digital currency. 

ARK Invest, headed by outspoken bitcoin bull Cathie Wood, filed an application this week with the Securities and Exchange Commission for an ETF that would track the performance of the S&P Bitcoin Index, a dollar denominated measure of bitcoin's price.

The filing comes on the heels of the SEC delaying its decision to approve three other applications in the last month, including filings from VanEck, WisdomTree, and Valkyrie

ETFs are securities that are pegged to an underlying asset or group of assets and can be bought and sold during market hours just like any other share. In the case of bitcoins, they would allow retail and institutional investors to have a stake in the cryptocurrency without going through the hassle of actually buying and holding tokens on their own.

That's the gambit that ARK Invest and at least 11 other investment firms are putting to regulators, even as bitcoin itself fluctuates wildly in price.  

Hats in the Ring 

Bitcoin enthusiasts have been eagerly awaiting an ETF for years, going back to the first application from the Winklevoss twins in 2013, which was rejected along with several others over the last eight years. 

Many thought the newly appointed SEC Chairman Gary Gensler would be a game-changer, given his past experience teaching a course on cryptocurrencies at MIT, but the veteran financial regulator has proven more cautious than many expected, saying that bitcoin itself needs more government oversight before an ETF can be approved. 

In the meantime, interest in a bitcoin ETF is only growing, and firms are lining up outside of the SEC regardless of the messaging coming from Gensler. 

According to industry-watchers, the reason for this is simple: they're hedging their bets. 

"ETF issuers know there is significant investor demand for a bitcoin ETF," said Nate Geraci, president of the The ETF Store, an investment advisor for ETFs. "Because of that, regardless of the SEC's current position, any issuer that wants to have any shot at being competitive in the bitcoin ETF market has to throw their hat in the ring." 

Raising the stakes is the possibility that if and when the SEC does approve a bitcoin ETF, the competition is likely to be fierce, as a mix of legacy investment firms, existing ETF issuers, and bitcoin-focused fintech companies pile into the market. 

"Once the SEC does approve a bitcoin ETF, it's going to be no-holds-barred," Geraci said. "You're going to see cutthroat competition, from fees to marketing to distribution. It may be the most competitive segment of the ETF market we've ever seen."

He added that ARK Invest in particular has advantages in such a competitive market. With a loyal base of investors and a personal brand that is already synonymous with bitcoin, Wood could bring the marketing and distribution power that is needed to elbow out the competition. 

"What's interesting with ARK is that their entire brand is built around disruptive innovation, and if you think about it a bitcoin ETF fits right into that," he said.

As for the ETFs themselves, most of them are roughly the same in structure, meaning right now the quality of individual applications matters less than the SEC's overall regulatory approach.

Workarounds to Regulation

Right now, the Grayscale Bitcoin Trust, which invests in trusts that hold a large amount of bitcoin, dominates the market for bitcoin-based financial products, though Geraci added that these types of products are "workarounds" until an ETF hits the market. 

"Those products exist primarily because a bitcoin ETF hasn't been approved," he said.

But will this market demand impact the SEC's decision? Not likely, said Scott Chipolina, a writer for the crypto news source Decrypt and a former financial regulator in the British Overseas Territory of Gibraltar. "The SEC has never really made a big decision like this based on political pressure or pressure from an industry." 

He compared the SEC's approach to the U.S. Federal Reserve's relative caution in embracing central bank digital currencies, even as China and other countries move full-steam ahead. 

"Jerome Powell said that for the United States it's better to be right than first," Chipolina said. "From my reading of the situation, that's where the SEC sits as well."

However, the U.S. regulator isn't operating in a vacuum. Canada launched its first bitcoin ETF earlier this year, and Brazil joined the pack this week. With more countries around the world stepping up, some argue the SEC could lose its ability to lead in the space, making it more difficult for the agency to raise or lower the bar. 

"I think the commission needs to realize that these financial assets are here to stay and if they don't regulate it, it's going to be either unregulated or it's going to move to a non-U.S. market," said Todd Cipperman, financial regulations expert and founding principal of Cipperman Compliance Services, a consulting firm. 

Cipperman also noted that he's unconvinced by the SEC's argument that it can't move forward with approving a bitcoin ETF because of bitcoin's lack of regulation. Indeed, he sees regulation and regulatory approval as interconnected processes. 

"The advantage of an ETF that's registered is that it's regulated and, in theory, safer for investors, as opposed to the kind of Wild West of off-exchange crypto markets," he said.

"To some extent, the VanEcks of the world are Wyatt Earp bringing law to Dodge City."

In other words, he'd like to see the SEC step up sooner rather than later. 

"Fundamentally, regulation is good," he said. "The example I've used before is the mutual fund. In the 1920s and 1930s, mutual funds were considered very much like cryptocurrencies, these crazy things rife with fraud and investors getting taken advantage of. Well, what did they do? They adopted the Investment Company Act, and they regulated it. I don't think anybody thinks of the mutual fund as risky anymore." 

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