If Bitcoin forks, spot ETFs could choose the winner

This weekend sees the scheduled release date of Bitcoin Core version 30 (v30) and an incredibly contentious moment in Bitcoin’s history.

Although reports of alleged plans for a hard fork have circulated in the run-up to this controversial software release, it is technically possible — albeit incredibly unlikely — that Bitcoin could experience a blockchain split.

In the event of a surprise chain fork, the role of spot exchange traded fund (ETF) sponsors in judging which chain will retain the bitcoin name and its BTC ticker symbol is underreported and poorly understood.

Regulatory filings for US-based BTC spot ETFs reveal that their sponsors have the discretion to choose which Bitcoin fork they regard as the valid one in the event of a hard fork.

This upends the usual practice of letting miners or node operators decide, which usually choose the fork with the most processing power as the valid Bitcoin chain.

The power to choose which bitcoin is bitcoin

BlackRock’s $87 billion IBIT prospectus states unambiguously, “In the event of a hard fork of the Bitcoin Blockchain, the Sponsor shall determine which network shall constitute the Bitcoin network and which asset shall constitute bitcoin in accordance with the Trust Agreement.” 

Elsewhere, Blackrock admits that it might not even choose the largest BTC as the real BTC. “There is no guarantee that the Sponsor will choose the network that is the most valuable fork,” its lawyers disclaim.

Bitwise’s spot bitcoin ETF prospectus includes similar language. “The sponsor will promptly make a good faith determination as to which digital asset network is regarded by the community as the Bitcoin network and which is the ‘forked’ network.”

“Unless an announcement is made informing investors that a fork will be supported, a newly-forked asset should be considered ineligible for inclusion in the Trust,” disclaims ARK Investment Management.

In addition to the discretion to choose which blockchain is the real Bitcoin, some spot ETF sponsors also reserve the right to disregard the value of a hard forked blockchain entirely for the purposes of the ETF holdings.

“With respect to any fork, airdrop or similar event, the sponsor will cause the trust to irrevocably abandon the incidental rights,” disclaim both ARK Investment Management and Grayscale.

“The only digital asset to be held by the trust will be BTC” as the ETF sponsor defines BTC.

Read more: Crypto reacts to SEC’s dramatic spot bitcoin ETF approvals

Intraday buying power for the BTC they choose

In the case of ETFs, sponsors actively buy and sell assets on an exchange throughout each trading day.

In order to buy and sell BTC, the sponsors must agree which asset is BTC. Powerful, multi-billion dollar ETF sponsors will choose, on a real-time basis and with untold liquidity, which asset to purchase for their ETFs during any chain fork situation.

Any sharp observer with the patience to read regulatory filings has noticed the discomforting reality that spot ETF sponsors choose with human discretion — not by mining hash power or node count — which fork of BTC is their real BTC.

Spot ETF sponsors are a new echelon of power, alongside BTC miners, with the privilege of determining which digital asset preserves the BTC ticker symbol and their massive investment flows.

As a relatively new set of entities with this power — introduced only since the Securities and Exchange Commission’s approval of spot ETFs in January 2024 — financial institutions like Blackrock and Fidelity hold extraordinary power over investment flows into the BTC that they select as the real BTC.

Could Bitcoin Core v30 actually cause a chain split?

Core v30, if developers release it on-time, will introduce three changes to the behavior of Bitcoin nodes queueing up transactions for upcoming blocks. 

For the first time in over a decade, nodes will accept BTC transactions into their mempool with multiple OP_RETURN outputs.

Second, the data size of these outputs may reach 100 kilobytes — 120,000% higher than their previous 83 byte limit.

Third, v30 software will nerf the “datacarriersize=” operation of node operators who want to filter out these large chunks of data.

Importantly, none of these changes affect the Nakamoto Consensus rules of nodes accepting validly mined transactions.

Core v30 will only create differences between the mempools of pending transactions — not chain tips — of node operators using alternate software clients like Knots, BTCD, or Core v29 and prior.

For this reason, the Bitcoin blockchain will almost certainly not fork this weekend. Sarcastic jokes about the death of BTC today are earning laughter across social media.

Nonetheless, the imminent release of v30 is a helpful reminder about the power of ETF sponsors if Bitcoin ever were to hard fork.

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