In a twist that has left crypto enthusiasts on the edge of their seats, the United States Securities and Exchange Commission (SEC) has opted to defer its decisions regarding several proposals for spot Bitcoin exchange-traded funds (ETFs). Notably, these proposals come from leading financial institutions, including BlackRock. This move by the SEC arrives against the backdrop of an impending government shutdown, which is anticipated to have repercussions on the country’s financial regulators and various federal agencies.

The SEC’s decision has sent shockwaves through the crypto community, with James Seyffart, a Bloomberg ETF analyst, actively keeping everyone informed through his X account (formerly Twitter). The delay orders from the SEC have already been served to major players like BlackRock, Bitwise Invest, Invesco, and Galaxy Digital, as reported by Seyffart.

Seyffart has further speculated that the remaining applications from WisdomTree, VanEck, and Fidelity will likely meet the same fate, especially considering the looming possibility of a government shutdown. In his own words, “Okay. Guessing the SEC is done for the night. We’re expecting the other 3 Bitcoin ETF delay orders tomorrow before the government shut down.”

Government Shutdown Heightens Tensions

While many market participants were initially expecting responses from the SEC by mid-October, the advanced delays, coming two weeks ahead of the anticipated second deadline, have been attributed to the potential US government “shutdown” set to occur on October 1. With the House and Senate yet to reach a consensus on various funding bills, the urgency to avoid a shutdown has intensified.

SEC’s Official Reasoning for Delaying the Bitcoin ETFs

The SEC’s decision to delay Bitcoin ETFs has not been without reason. The regulatory body has raised several concerns and considerations over the proposed spot Bitcoin ETFs, including legal and policy issues that necessitate further analysis. Central to their concerns is the need to ensure that national securities exchange rules are robustly designed to prevent fraudulent and manipulative acts, all in the interest of protecting investors and the public.

Moreover, the SEC has expressed reservations about the liquidity, transparency, and susceptibility of the Bitcoin markets to manipulation. They are eager to delve into the relationship between the Bitcoin spot market and the CME Bitcoin futures market, probing how one may influence the other.

The regulator has also questioned the effectiveness of a surveillance-sharing agreement that the Exchange intends to have with Coinbase, Inc. Their concern revolves around whether such an agreement can truly deter malicious practices effectively.

Another focal point in the SEC’s deliberation is the notion that Bitcoin, due to its geographically diverse and continuous trading nature, could be vulnerable to price manipulation. To establish the validity of this claim, the SEC is inviting comments from stakeholders.

Lastly, the SEC is keen to hear opinions on the adequacy of the statements made by the Exchange in support of their proposal.

Industry Insights

Scott Johnsson, a finance lawyer at Davis Polk, has offered his insights into the situation. He points out that the SEC’s room to further deny spot BTC ETFs is much smaller than many realize. He references a precedent, suggesting that those who think they can propose an entirely new and unrelated theory have not read the Grayscale ruling closely enough.

Johnsson also brings attention to the looming government shutdown and its potential impact, stating that the SEC will have a “skeletal staff” in a shutdown, with only 7-8% operational. He speculates that if no petition for rehearing regarding the Grayscale case is made before the shutdown, it might indicate that approval is unlikely to come at all. The odds, he believes, would significantly drop. He suggests that the SEC seems to be trying to tidy up its affairs before an extended break.

With another set of deadlines for these applications approaching in mid-January, further delays remain a possibility. However, the SEC must finalize its decision by mid-March.

Eric Balchunas, another ETF analyst at Bloomberg, previously estimated a 75% chance of a Bitcoin spot ETF being approved by the end of 2023. However, with the current delays, this prediction may not come true. Balchunas argues that the decisive ruling in favor of Grayscale against the SEC by the US Court of Appeals is a significant factor in his optimistic projection, increasing the probability to 95% by the end of 2024.

As of the latest update, Bitcoin is trading at $26,996, marking a 2.1% increase in the last 24 hours.