The United States Securities and Exchange Commission’s floor is littered with failed crypto fund filings, but this year, following Canada’s lead, the U.S. might actually have an exchange-traded fund that tracks digital assets.
After all, the price of Bitcoin (BTC) is booming, the SEC has a new crypto-savvy chairman, and Canada, which is sometimes viewed as a beta test site by U.S. regulators, debuted a Bitcoin ETF in late February that by most accounts has been stunningly popular. But does a crypto ETF really matter anymore?
Clearly, a lot has changed in the past year — what with a global pandemic, a change in administrations in Washington and new price records being set regularly on the crypto front. Whereas many predicted as recently as June 2020 that an SEC-sanctioned Bitcoin ETF would be a very “BIG Deal” and “open the flood gates” to BTC adoption, with a crypto ETF now on the brink, some observers aren’t so sure anymore.
“I used to think it would be a game-changer but now I think it would be just another step in the evolution of crypto,” Lee Reiners, executive director of the Global Financial Markets Center at Duke University School of Law, told Cointelegraph.
Eric Ervin, CEO of Blockforce Capital and Reality Shares and co-founder of Onramp Invest, told Cointelegraph: “I think a crypto ETF is less significant than we thought before because a lot of institutional investors finally got tired of waiting and figured it out.” Ervin’s firm was one of nearly a dozen whose application was sideswiped by the SEC — the Reality Shares ETF Trust application was pulled in February 2019 “on SEC advice.” That said, Ervin acknowledged that there “are still a massive number of investors on the sidelines” who might welcome such an investment option.
Meanwhile, applications to the U.S. agency keep flowing. Most recently, the Chicago Board Options Exchange requested permission to list a Bitcoin ETF proposed by asset manager VanEck.
State Street Corporation — one of the world’s largest custodians, with $38.8 trillion in assets under custody and/or administration — will be servicing the VanEck ETF, if approved. Nadine Chakar, head of State Street Global Markets, told Cointelegraph that the company is working to bring ETFs and exchange-traded notes to market in Europe and the Asia-Pacific region, adding that “Our clients have seen interest grow in Bitcoin and [...] there is a feeling the market is maturing.” Indeed, in the three years since early 2018 when Bitcoin interest last peaked:
“They feel that the market has become more efficient, crypto custody solutions have evolved to offer better security that they are comfortable with, and regulatory clarity has increased such as we’ve seen with the OCC’s [Office of the Comptroller of the Currency] recent announcements.”
More success in 2021?
Has the crypto ETF climate really changed in Washington though? Michael Venuto, co‑founder and chief investment officer of Toroso Investments, told Cointelegraph: “I believe the odds of a U.S. Bitcoin ETF being approved are higher than in previous years.” Improved crypto custody, reporting and transaction transparency have calmed many regulators’ concerns, he said, and “The fact that BNY Mellon announced its move towards crypto custody on the same day as a Bitcoin ETF was approved in Canada is not a coincidence.”
“Investors have been looking to the US as the next potential market for ETFs that track digital assets,” wrote FTSE Russell, a subsidiary of London Stock Exchange Group that produces stock market indices, in a recent blog post, adding: “And speculation has only increased in recent weeks with the first Bitcoin ETF launch in Canada joining crypto ETP listings in Germany and Switzerland, as well as the continued popularity of the Grayscale investment trusts tracking this market.”
Regarding Gary Gensler’s nomination as SEC chairman, “This goes a long way towards advancing innovation in the US financial markets,” added Ervin, who agreed that the likelihood that U.S. regulators will approve a Bitcoin ETF this year has improved. He added further:
“As a former Chair of the CFTC, Gensler understands the importance of financial innovation, but he also has a healthy respect for the potential damage that unchecked markets bring.”
Reiners observed that based on what the SEC had been saying recently ETFwise — which isn’t much — a U.S. crypto ETF seems to be no closer than a year ago. However, when taking a broader look at the maturation of the crypto market and the subsequent institutional interest, he believes “It’s getting harder for the SEC to continue to say no.”
Is an ETF better than a trust?
But would an SEC-sanctioned ETF really be of major consequence now? What, for instance, does an ETF offer Bitcoin investors that current “trusts” like Grayscale Bitcoin Trust don’t?
GBTC and other trusts trade over the counter, not on major exchanges like the New York Stock Exchange, noted Reiners. By comparison, “An ETF is widely accessible to all,” including retail investors without access to OTC markets.
State Street’s Chakar noted that GBTC is essentially a closed-end fund open to qualified investors, and although shares of the trust are available on the secondary market to retail investors, those shares “are not tied directly to the price of Bitcoin. As such shares most times trade at a premium — or a discount — to the underlying price of Bitcoin.”
Venuto added further: “The ETF structure provides for intra-day creation and redemption to meet demand. This function removes the premium and discount issues which have impacted the pricing of GBTC” — though he opined that if regulators were to approve a Bitcoin ETF, “Then in short order they would allow GBTC to convert to a similar ETF like structure.”
Along these lines, Canada-based investment manager Ninepoint Partners, which launched a Bitcoin trust two months ago, this week announced plans to convert its trust to an ETF on the Toronto Stock Exchange — following other Canadian investment firms seeking to capitalize on the untapped crypto ETF market in the country.
If a U.S. crypto ETF comes to pass, how would it play out? Would it bring in more institutional investors, for example? “Many institutions can only invest in funds, so the ETF is a wonderful step in the right direction,” Ervin said.
Institutional interest will continue to build regardless of an ETF, opined Venuto: “In terms of institutional adoption, that ship has sailed. [...] An ETF will be primarily used by individual investors and financial advisors.”
“An ETF is more attractive to both institutions and retail investors in that it does tend to carry much less liquidity risk and more transparency to the underlying price of the asset — and fees associated with it,” said Chakar.
But what about Bitcoin and cryptocurrency adoption in general? Would a U.S. crypto ETF transform that landscape? Reiners told Cointelegraph:
“There are now lots of ways for retail investors to get exposure to crypto, and the list keeps growing. Plus now we have Tesla and other public companies investing in Bitcoin. The barrier between the crypto sector and the traditional financial system has been eroding for several years now; a Bitcoin ETF would further blur this boundary.”
Regarding Tesla, MicroStrategy and other public companies that have purchased Bitcoin recently, Chakar told Cointelegraph that “Investing in a company that has publicly acknowledged that it’s buying Bitcoin is probably not what most institutional [investors] would do to gain exposure to the asset.”
She added that crypto has been around for 10-plus years now, “But it has never been packaged in a way that allows for integration into a portfolio that is seamless.” By comparison, “ETFs have proven themselves to be a preferred and growing investment alternative thanks to the fact they offer a lower cost, liquidity and tax efficiency that direct investments may not, especially in nascent vehicles like Bitcoin.” Ervin told Cointelegraph that he likes the idea of an ETF for things like gold or silver, but for him, “Wrapping bitcoin up into a fund seems silly to me.” He added:
“There is no doubt that it is a better vehicle than a closed-end product, and competition will bring better fees and price discovery, but I don’t think most investors realize that they can buy Bitcoin directly without worrying about the cumbersome burden and costs of a fund.”
“Bitcoin doesn’t need an ETF”?
All in all, it looks like a U.S. crypto ETF will eventually come. As Reiners noted: “Regardless of their [the SEC’s] view on the merits of an ETF, if they are the lone holdouts, you have to wonder how much longer before they cave to the immense pressure and interest for an ETF.”
Under present circumstances, a U.S. government-approved Bitcoin exchange-traded fund may not be the game changer that some once predicted. A year ago, most didn’t anticipate the current institutional absorption of digital assets.
As Macrae Sykes, portfolio manager and research analyst at Gabelli Funds — an investment management firm — told Cointelegraph, institutional interest in cryptocurrency continues to grow. Coinbase’s initial public offering filing and Bank of New York Mellon’s recent announcement that it will support digital currencies offer further evidence of potential growing demand: “The ETF approval in Canada is just another step in the evolving regulatory process for accessing digital assets.”
“Bitcoin doesn’t need an ETF,” Venuto told Cointelegraph. Still, even if no longer a game changer, there is little for a crypto enthusiast not to like about an SEC-sanctioned crypto ETF: “Access is access and the more access to the asset class, the better,” said Ervin. After all, “Not everyone wants to own bitcoin directly.”