Wedding bells are beginning to ring across the $1.6 trillion crypto market. Not everyone is cheering, however. Following an explosive year for digital assets that began with a sweeping regulatory crackdown and ended with a stunning rise in token prices, the original cryptocurrency — bitcoin — may soon get hitched to one of the most popular inventions of traditional finance: the exchange-traded fund. The officiant? Gary Gensler’s SEC. In a strange twist, Washington’s most aggressive crypto enforcer is expected in the coming days to clear the way for the first-ever ETF directly tracking bitcoin in the U.S. ETFs, which are similar to mutual funds, have surged in popularity in the post-financial-crisis era. Crypto backers believe that a green light from the SEC will open the doors of the digital asset market to the masses and cement its place in American finance. “We’re at an inflection point,” said Grayscale CEO Michael Sonnenshein, whose firm is one of a baker’s dozen including BlackRock and VanEck that are awaiting the regulator’s word on their pending bitcoin ETF bids. “Maybe once — if at all — in a generation a new asset class is born. We fundamentally believe that crypto is one of those once-in-a-generation opportunities.” Yet, if allowed to go live, the bitcoin ETFs stand to become another front in Washington’s crypto clashes, fanning long-running debates over the market’s value and riskiness for everyday investors and retirees. Some progressive lawmakers are already sounding the alarm, while one prominent investor advocate — Better Markets CEO Dennis Kelleher — tells MM that approval would be an “historic mistake” for the SEC. ETFs are pooled funds that trade on regulated exchanges like the New York Stock Exchange and Nasdaq and are built to track the prices of underlying assets — in this case, bitcoin. Crypto executives and entrepreneurs have long hailed the prospect of a bitcoin ETF as a new, headache-less and, perhaps most importantly, regulated way for investors to dabble in the world’s largest crypto market alongside shares of Apple, GameStop or any other stock. But the SEC has shot down dozens of bitcoin ETF applications on the grounds that the bitcoin market — currently valued at about $840 billion — is riddled with problems like manipulation. The crypto market’s newfound optimism was ignited last year when a federal court ruled that the SEC needed to revisit its rejection of Grayscale’s bid to convert its more than $26 billion bitcoin trust into an ETF. Now, as a critical deadline for another one of the pending applications nears, the industry is rife with speculation that an approval is only a matter of when. “It’s going to be a tremendous catalyst toward shifting public perception and integrating — starting with bitcoin — these cryptocurrencies into the mainstream,” Crypto Council for Innovation CEO Sheila Warren told MM. “It’s a watershed moment.” Gensler has not backed down from his concerns about crypto despite the hype around bitcoin ETFs. Just last month, he said the market “experiences outsize fraud, abuse and noncompliance relative to its size.” The agency has continued to wage its high-profile legal crusade against crypto middlemen, which Gensler argues are putting investors at harm by not falling in line with the agency’s decades-old rules for institutions dealing in assets like stocks and bonds. A federal judge in New York recently reaffirmed the SEC’s argument that the 1946 test determining what is a security can still apply to crypto, handing Gensler’s agency a key win over Do Kwon’s Terraform Labs. (More on that below.) For crypto skeptics, there is still hope that the SEC will reject the applications. Their concern is that the ETF wrapper will give bitcoin a veneer of legitimacy, despite the asset’s often wild moves. Kelleher argued that the SEC still has legal levers that it can use to deny the applications. “An ETF that owns the 500 most important companies in America is a good, solid way to save for your retirement,” said Rep. Brad Sherman (D-Calif.), a senior member of the House Financial Services Committee. “An ETF that invests in basically air [is] something that produces no income and has no value except there might be another sucker who will pay you even more for it.” It’s Thursday — Any predictions for Friday’s jobs report? What are you watching? Let us know at zwarmbrodt@politico.com.
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