It could be several months before regulatory approval is granted for spot Bitcoin ETF options in the United States

Could approval for options on the recently launched U.S. spot Bitcoin exchange-traded funds (ETFs) might face a lengthy regulatory process, potentially diminishing the allure of these underlying products, as indicated by multiple sources within the industry.

In a groundbreaking move for the crypto sector, the Securities and Exchange Commission (SEC) greenlit spot Bitcoin ETFs last month, with ten products entering the market on January 11. However, the anticipated options on these ETFs are encountering delays due to the absence of an established regulatory framework for their approval.

The SEC’s Green Light

The SEC’s approval of spot Bitcoin ETFs last month marked a watershed moment for the crypto sector, with ten ETF products officially entering the market on January 11. These ETFs, seen as a significant step toward mainstream acceptance of digital assets, offer investors exposure to the price movements of Bitcoin without directly holding the cryptocurrency. Typically, the SEC swiftly approves technical rule changes for options listing shortly after an ETF commences trading. However, because Bitcoin is considered a commodity, the approval process for spot Bitcoin ETF options may also involve the Commodity Futures Trading Commission (CFTC), responsible for overseeing commodity derivatives, according to industry insiders.

Options on Hold

Navigating the jurisdiction and oversight complexities associated with products linked to spot Bitcoin ETFs is an ongoing challenge for the CFTC. The dual regulatory engagement introduces added complexity and the potential for what some view as “regulatory headaches,” notes Martin Leinweber, a digital asset product strategist at MarketVector Indexes, the benchmark provider for VanEck’s spot Bitcoin ETF. Leinweber estimates that the approval process could span between two and ten months. Options, as listed derivatives, provide investors with the right to buy or sell an asset at a predetermined price within a specified timeframe. This delay is attributed to the absence of an established regulatory process for approving options on these innovative financial products.

Regulatory Complexity

The regulatory landscape surrounding Bitcoin, viewed as a commodity by authorities, introduces additional layers of complexity. The Commodity Futures Trading Commission (CFTC), responsible for overseeing commodity derivatives, may also play a role in approving options on spot Bitcoin ETFs. The need for dual regulatory approval poses challenges related to jurisdiction and oversight, further complicating the regulatory path. The absence of options presents risk management challenges for significant investors who could inject up to _{$100 billion} into these ETFs, potentially dissuading some from participating, warns Yesha Yadav, a law professor at Vanderbilt University.

Obstacles to Market Innovation

Beyond individual investor concerns, the delay poses an obstacle to the crypto industry’s broader objective of introducing more innovative crypto products to the market. Regulatory clearance plays a pivotal role as “the regulators are the gatekeepers,” remarks John Roglieri, head of capital markets at FalconX, a market-maker for the ETFs.

While dual approval for options is not unprecedented, it remains uncommon. In the case of the first ETF tied to a physical commodity, SPDR Gold Shares ETF, it took over three years for the CFTC to approve options. Notably, options on platinum and palladium ETFs were never approved following a 2010 application.

Nasdaq, CBOE, and NYSE Arca, the exchanges listing the ETFs, submitted requests to the SEC in January seeking approval to launch options. CBOE anticipates listing options later in 2024.

The Options Clearing Corporation (OCC), responsible for clearing options for exchanges, needs CFTC approval for clearing and settling commodity-based products. The OCC is working with regulators on the required approvals but refrains from commenting on the possible timeframe.

Exchange executives are expected to engage with CFTC officials soon to discuss the matter, according to sources familiar with the issue. Given the decade-long journey for SEC approval of Bitcoin ETFs, a delay in options approval is not unexpected, according to Adam Sze, head of digital assets product at Global X, which recently withdrew its application for a spot Bitcoin ETF.

Conclusion

As the crypto industry eagerly awaits the introduction of options on spot Bitcoin ETFs, the intricate regulatory journey suggests that patience will be crucial. The dual regulatory engagement involving the SEC and CFTC introduces complexities that may extend the approval timeline by several months. The resolution of these regulatory challenges holds the key to unlocking the full potential of these innovative financial products, shaping the future landscape of cryptocurrency investments in the United States.