While the Securities and Exchange Commission has long been dragging its feet when it comes to approving a heavily demanded Bitcoin-based exchange-traded fund, the person with the power to break the logjam indicated the fastest way to approval might run down a different path.
While the logjam is stacked with companies that have applied and been stonewalled by the SEC seeking to offer funds based around physical Bitcoin ownership, a Bitcoin ETF based on Bitcoin futures might be the easier path to SEC approval.
In published remarks to the Aspen Security Forum this week, SEC Chairman Gary Gensler said he’s setting his sights on stricter regulation for the $1.6 trillion cryptocurrency market, pointing to seven key issues the SEC is looking at: initial coin offerings, trading venues, lending platforms, DeFi, stablecoins, custody, and exchange-traded funds (ETFs).
But nothing’s happening on any of those fronts very quickly, as other pressing issues such as regulating meme stock (GameStop, etc.), environmental, social and governance (ESG) compliance, Special Purpose Acquisition Companies (“SPACs”), and the Robinhood initial public offering (along with the broader issue of commission-free trading apps), are occupying the U.S. market watchdog.
Still, crypto regulation seems very much on Gensler’s mind in listening to his Tuesday remarks at the Aspen Security Forum.
“Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West,” he said. “This asset class is rife with fraud, scams, and abuse in certain applications. There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information. If we don’t address these issues, I worry a lot of people will be hurt.”
Future lies in Bitcoin futures?
While Gensler did not lay out any specific timeline for when the SEC might take any further action on any crypto front, he did appear to lay out a sort of roadmap for how a Bitcoin ETF could gain SEC approval—perhaps sooner than many people believe.
In bringing up investment vehicles (such as a Bitcoin ETF) providing exposure to crypto assets, Gensler said:
“Such investment vehicles already exist, with the largest among them having been around for eight years and worth more than $20 billion [an apparent reference to Grayscale Bitcoin Trust]. Also, there are a number of mutual funds that invest in Bitcoin futures on the Chicago Mercantile Exchange (CME).
“I anticipate that there will be filings with regard to exchange-traded funds under the [1940] Investment Company Act (’40 Act). When combined with the other federal securities laws, the ’40 Act provides significant investor protections.
“Given these important protections, I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded Bitcoin futures.”
ETF industry pioneer Dave Nadig, chief investment officer and director of research of ETF Trends and ETF Database (recently bought by index provider Alerian), told MarketWatch this week he thinks Gensler, in his remarks, laid the ground work for a Bitcoin ETF to hit the market soon, possibly before the end of 2021.
“I’d be shocked if we don’t have a futures-based [ETF] product by year-end,” Nadig said.
Gensler did not specifically mention the many Bitcoin ETF applications the SEC has received within the past couple of years that do not own Bitcoin futures, but instead seek to own Bitcoin directly (none of which have been approved).
This is widely being viewed as Gensler attempting to distinguish between ownership of Bitcoin in the futures market, which is heavily regulated, and a Bitcoin ETF that would involve the fund buying Bitcoins through unregulated parties.
Notably, digital asset management firm Grayscale Investments, which runs the closed-end Grayscale Bitcoin Trust (GBTC), just announced it has hired David LaValle, the former CEO of index provider Alerian, to be its ETF chief in anticipation of converting GBTC into an ETF once the SEC clears the way for approval.
A Bitcoin ETF would be a retail-accessible trading vehicle offering both individuals and institutions (including retirement plans) exposure to the Bitcoin market without having to hold Bitcoin itself. It could well open the door to ETFs make meaningful inroads into retirement plans long dominated by mutual funds, and LaValle said a Bitcoin ETF is merely part of the natural evolution of ETFs.
“Starting 25-plus years ago, ETFs were focused on U.S. domestic equities, then moving into international equities, commodities, fixed income and sub-sectors of fixed income,” LaValle told CoinDesk in an Aug. 4 article. “Obviously now we’re moving into the next wave of evolution which I’m extremely excited about.”
Bitcoin in 401ks?
Are 401k plan sponsors getting excited too? Perhaps not yet, but give it some time to build.
401k investment menus tend to lean conservative, believing slow and steady over a 30-year or 40-year time horizon will win the retirement race. Plan sponsors, therefore, avoid hyper-volatility in the products they offer. Yet SkyBridge Capital’s Anthony Scaramucci—who filed to create a Bitcoin ETF in March—earlier this year told 401k Specialist that very volatility as a reason to include Bitcoin in retirement accounts.
“People can trade within their 401k without tax consequences,” Scaramucci said. “If we’re right about Bitcoin and I was your financial advisor, I would tell you that over the next 100 years, this is the technology that people are going to use for a large swath of commerce on the planet. These coins are scarce, and they’re going to be valuable. For that reason, I do think it’s appropriate to own a few in a retirement account.”
Scaramucci said it is particularly so considering the time frame. “Another reason I like it for the 401k is that people have trouble with volatility and timing, but if your time frame is long enough in Bitcoin, you’re not going to get shaken out by a pullback, and at least historically, the rewards have been incredible.”
In addition to Skybridge Capital, the list of approximately a dozen others who have filed with the SEC for the right to launch a Bitcoin ETF includes the likes of Morgan Stanley, VanEck, Valkyrie Digital Assets and WisdomTree.
Futures filings already reaching SEC
Just this week, Atlanta-based asset manager Invesco filed with the SEC to list an ETF with exposure to Bitcoin futures and other related assets. In the filing, Invesco stressed that the ETF will not invest in Bitcoin directly. Instead, it will seek to have full exposure to Bitcoin futures and at times may have exposure to other investment vehicles, including Bitcoin ETFs listed outside the U.S. and investment trusts such as Grayscale Bitcoin Trust.
According to Invesco’s filing, the fund is “non-diversified,” and thus is not required to meet diversification requirements under the Investment Company Act of 1940.
ProShares also reacted quickly to Gensler’s comments, as it also registered a plan with the SEC this week for a fund based on Bitcoin futures, called the ProShares Bitcoin Strategy ETF.
With Gensler indicating the SEC is more likely to approve a futures-based Bitcoin ETF over a physical one, similar filings are expected to follow.
Bitwise Asset Management is one of many firms aching to get into the U.S. crypto ETF market when the doors are opened. Says Teddy Fusaro, its president, told Forbes recently: “It’s frustrating for some investors that the U.S. doesn’t have a fully registered exchange-traded product for cryptocurrency. But the U.S. market is the envy of the world for a reason: best regulatory oversight, clearest rules, most transparent regulator—even if it takes a little longer.”
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