Are Crypto Exchange Traded Funds (ETFs) Finally Coming To The United States Of America? Dozens of cryptocurrency-based ETFs or ETF-like products are currently being sold on regulated exchanges in Europe, while Canada and Brazil have already launched their own versions this year. In the past eight years, however, not a single investment firm has received approval from the U.S. Securities & Exchange Commission (SEC) for a cryptocurrency-backed ETF. The winch can now turn.
“A futures-based bitcoin ETF will be approved in the coming weeks, not months,” John Sarson, co-founder and CEO of Sarson Funds LLC, told Cointelegraph, adding that “the futures market for bitcoin is now extremely good tested and very fluid at the age of three. “
The outlook wasn’t nearly as promising a month ago, but things picked up on August 3 when SEC chief Gary Gensler signaled in a statement that U.S. regulators aren’t necessarily against futures-based Bitcoin (BTC) ETFs may be.
Gensler said he looks forward to his staff’s reviews of recent filings from companies wishing to market exchange-traded funds with indirect exposure to the world’s leading cryptocurrency, “especially if they” [fund offerings] are limited to CME “- ie Chicago Mercantile Exchange -” traded Bitcoin futures “.
“Gensler surprised us all,” Kathleen Moriarty, Senior Counsel at Chapman and Cutler LLP, told Cointelegraph. The Gensler Declaration, together with the subsequent withdrawal of Ethereum (ETH) ETF registrations by fund managers VanEck and ProShares, led two Bloomberg analysts to believe that a futures-based Bitcoin ETF could be approved as early as October.
Is that too much to read into the agency’s tea leaves? Is a futures-based BTC ETF really imminent, and if so, why can’t an ETF take ownership of Bitcoin directly? Gensler, who once headed the CFTC, which regulated US derivatives markets – including futures – might believe that a futures-based crypto ETF offers another level of investor protection, that is, CFTC oversight in addition to SEC oversight.
Also, keep in mind that a futures-based BTC mutual fund, Bitcoin Strategy ProFund (BTCFX), received SEC approval in July without much ado. Perhaps the SEC is using futures-based crypto funds as a transitional product to test the regulatory waters with physically-based crypto ETFs that are slated to follow in 2022, for example, if all goes well. But is a futures-based Bitcoin ETF really the best product for investors?
Are Bitcoin ETFs around?
Chris Kuiper, Vice President at CFRA Research, told Cointelegraph, “We just think it’s a matter of time. Given that the SEC allows gold ETFs based on futures, it would be difficult for them not to ultimately approve a Bitcoin ETF that is also based on the now well-established Bitcoin futures market. “
How Bloomberg analysts Eric Balchunas and James Seyffart might interpret the withdrawal of VanEck and ProShares’ proposals for Ethereum ETFs as a good sign for crypto ETFs may be startling at first glance, but how Banz Capital CEO John Iadeluca said it Cointelegraph stated: VanEck and ProShares were quick to withdraw their Ethereum Futures ETF applications, they didn’t do the same thing with their Bitcoin futures ETF applications, which seems like a positive sign for a Bitcoin ETF to be approved. “As these fund providers saw a door being broken open, presumably there was no need to monitor all doors.
Iadeluca further noted that when the Chicago Mercantile Exchange took its first steps in cryptocurrency futures it started Bitcoin futures and a few years later Ethereum futures. “It would make sense for the same order to occur with futures ETFs, and recent ETF filing activity seems to indicate that this is happening earlier than expected,” added Moriarty:
“The other strange thing that nobody mentioned is that on May 11th, 2021 the [SEC’s] The Division of Investment Management issued a statement regarding its current views on funds registered under the 1940 Act that invest in Bitcoin futures. The statement said it does not yet allow the offering of 1940 Act-registered funds, which are ETFs that provide Bitcoin exposure by investing in Bitcoin futures. “
Obviously, some ambiguities remain. “One can only imagine a permit in October,” said Moriarty, who worked with Cameron and Tyler Winklevoss in 2013 on the first SEC filing for a Bitcoin ETF, which was ultimately rejected by the agency in 2017.
The best product for investors?
Why might the SEC approve a future-based crypto ETF before a physically-based one? After all, “futures-based bitcoin funds don’t invest directly in the cryptocurrency – don’t track BTC as closely as physically held funds,” and they can be more costly, Kapil Rathi, CEO and co-founder of an institutional cryptocurrency exchange, CrossTower, said Cointelegraph. The company “doesn’t believe it’s the best vehicle for investors. This leads to significant inefficiencies in terms of constant trading and rollover costs. “
Neena Mishra, director of ETF Research at Zacks Investment Research, told Cointelegraph, “Investors would prefer physical Bitcoin ETFs, but if investors don’t see physical BTC, they will buy futures ETFs.” She believes the futures are approved -based version is likely soon, maybe in November.
Of course, this isn’t the crypto ETF most have been waiting for – Balchunas likened it to “serving O’Douls.” [non-alcoholic beer] if the party wants real beer ”- but Sarson, for example, was unimpressed.
“A futures-based BTC ETF will be very popular, just as futures-based commodity ETFs are very popular with investors,” he told Cointelegraph. “I think it will look no different from a physical commodity ETF.” The “inevitable K-1” tax forms won’t stop many from investing in the futures-based product, he added.
Could futures-based ETF approval open the floodgates for other crypto-based ETFs in the US? “The introduction of a BTC ETF could improve the prospects for ‘physically’ backed ETFs in the near future,” Rathi told Cointelegraph. Administrators who want to launch physically secured ETFs could refer to the functioning futures-based ETF as a kind of proof of concept. Rathi added, “You could provide the SEC with clear data on why a physically-backed ETF would be significantly better for investors than a futures-based ETF.”
Market manipulation concerns
Another question is why the SEC (seemingly) believes that a futures-based Bitcoin ETF would offer more investor protection than one that invests directly in the digital currency. After all, as law professor JW Markham wrote several years ago, “the commodity futures market has been plagued by large-scale manipulation from the start, and it is still an issue.
In April, US regulators launched “one of the largest oil tampering investigations in history,” with traders allegedly putting pressure on oil futures markets.
Kuiper acknowledged that such a position would be “a bit strange” given that a major concern for the SEC regarding Bitcoin ETFs is the lack of regulation of the spot market and concerns about market manipulation, and told Cointelegraph:
“While the futures market is more regulated, futures contracts are a derivative and are therefore abstracted from the underlying commodity. So it seems that there should be more concerns about possible market manipulation with the bitcoin futures market as it is leveraged and settled in cash without the need to exchange or settle bitcoin with it. “
In addition, Rathi added: “Gensler solves counterparty credit risk by supporting a futures ETF. He’s also pushing for a product that the SEC has seen in the past, like VXX [a volatility ETF] and USO [an oil ETF]which are also based on futures. ”However, he believes that while a Bitcoin futures ETF“ solves a problem, it creates significant cost inefficiency. It also increases the risk that futures market makers might try to play the trades that the ETF administrator would make each month. “
As mentioned earlier, the SEC approved ProFunds’ open-ended BTC mutual fund in July, which primarily invests in bitcoin futures contracts.
ETFs are becoming increasingly popular over mutual funds because of their lower fees, tax efficiency, and the ability to trade like stocks. Firms that signed up in August to offer futures-based Bitcoin ETFs included Invesco, VanEck, Valkyrie Digital Assets, Galaxy Digital, and ProShares, a subsidiary of ProFunds.
Schedule for a “physical” Bitcoin fund
When can you expect a US ETF that invests directly in digital assets such as Bitcoin and Ethereum – that is, the “real beer”? “A real Bitcoin ETF backed by holding and storing real Bitcoin – similar to GLD with gold – is still not likely,” Michael Venuto, co-founder and chief investment officer of Toroso Investments, told Cointelegraph. Candidates for upcoming approval are all Bitcoin strategies, he added, that use futures and other securities “to track Bitcoin’s behavior. The tracking error could be quite high. “
Mishra sees the futures-based Bitcoin ETFs as a transitional product. Several U.S. approvals could come in November, and if they work smoothly, the SEC could perhaps approve physical ETFs in the first half of 2022.
When both futures and physical ETFs finally become available to investors, Mishra expects the physical ETF to become more popular than the futures-based one. In fact, many of those who hold futures-based Bitcoin ETFs could well migrate to the physical ETFs.
Related: The Big Crypto Flippening: Can Ethereum Overtake Bitcoin?
How about an Ethereum ETF? “No time coming soon,” Mishra said, adding that it will only be likely after a physical BTC ETF is finally approved. Would the approval of a physically backed ETF in the US be a big event? “In general, it would be positive for the crypto world,” she told Cointelegraph. Many investors have shied away from investing in cryptocurrencies due to security concerns such as losing access to their wallets. “An ETF would be safer and easier to trade.”
Overall, it seems that a futures-based crypto ETF might be easier for the SEC to approve at this point, even if the bitcoin tracking isn’t perfect and the fees are higher. It could play a positive role as a transitional product, introducing both investors and regulators to the new crypto ecosystem. However, “a physically deposited ETF, based more on GLD, would clearly be the optimal vehicle for investors,” as Rathi told Cointelegraph.