US regulators are set to overhaul settlement times for securities trades next May. While this move is expected to have a positive impact, it brings significant concerns for over $1 trillion in Exchange-Traded Funds (ETFs). Market experts have warned that the upcoming change will lead to increased costs and operational complications, primarily affecting more than 500 US-listed funds that hold assets overseas.

According to a report by Bloomberg, this step could pose challenges for ETFs. As the settlement time for transactions in ETF shares decreases from two days to one, the underlying assets may still take two to five days to complete, depending on their location. This creates a significant discrepancy in settlement times that could pose a challenge to key players in the ETF market.

SEC and ETF Dynamics

Liquidity providers play an important role in the operations of ETFs. They ensure the smooth functioning of these investment vehicles by arbitraging small price differences between ETFs and underlying assets. When the demand for ETFs is high, they create new shares to sell by purchasing more underlying assets.

Conversely, when demand is low, liquidity providers buy ETF shares from investors and redeem them for the underlying assets. This process is seamless for ETFs with US-listed assets. If an ETF experiences a sudden influx of investor capital, authorized participants may need to post collateral for an additional day due to the delayed settlement of the underlying assets.

Meanwhile, there is a growing acceptance of spot-based ETFs globally. This is according to a report by CoinGecko as cited by Reuters. Germany was among the early adopters, with the ETC Group Physical Bitcoin ETF launched in June 2020, now boasting $802 million in assets and holding the second-largest position.

Additionally, Europe has seen the incorporation of seven other ETFs in tax havens like Jersey, the Cayman Islands, and Liechtenstein, with smaller products trading in Brazil and Australia. It remains to be seen whether US spot Bitcoin ETFs can garner stronger investor interest and surpass their Canadian and German counterparts.

Growing Popularity of Spot Bitcoin ETFs

Canada has emerged as a front-runner in this space, with nearly half of the total investment, approximately $2 billion, flowing into seven spot Bitcoin ETFs launched in the country since 2021. The Purpose Bitcoin ETF, boasting $819.1 million in assets, is the largest among the 20 ETFs in this category.

Conversely, the United States has primarily approved ETFs tied to futures contracts, exemplified by the ProShares Bitcoin Strategy, which manages around $1.2 billion in assets. The SEC is reviewing as many as ten applications for spot Bitcoin ETFs in the country.

The potential size of the US spot Bitcoin ETF market remains a subject of debate, with initial estimates suggesting first-day demand could exceed $1 billion. It remains to be seen whether US spot Bitcoin ETFs can garner strong interest from investors and surpass their Canadian and German counterparts.

The SEC postponed the decision to approve spot Bitcoin ETFs from major asset management companies like BlackRock, Invesco, Bitwise, and Valkyrie. This delay came amidst congressional gridlock, raising concerns about the potential impact of a government shutdown.