Despite Regulatory Cold Water, the List of Crypto ETF Hopefuls Grows

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  1. Frank Chaparro

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    10 October 2018

    Despite Regulatory Cold Water, the List of Crypto ETF Hopefuls Grows
    US regulators are cold to the idea of a bitcoin exchange-traded fund tied to the volatile market for digital assets. But that hasn’t stopped more and more firms from exploring a fund of their own.
    US regulators are cold to the idea of a bitcoin exchange-traded fund tied to the volatile market for digital assets, but that hasn’t stopped more and more firms from exploring a fund of their own.

    The “bitcoin ETF,” a darling of crypto Twitter, has long been viewed as a natural next step in bitcoin’s maturation as an asset. It was even hailed by JPMorgan, the bank led by bitcoin basher Jamie Dimon, as a “holy grail.” Proponents say it could provide a new avenue by which retail investors could enter the market, unlocking a wave of capital to revive the once sanguine crypto markets.

    Regulators and skeptics don’t appear convinced that the market is ready for such a derivative. Citing concerns about manipulation, for instance, the Securities and Exchange Commission recently pushed off deciding on asset manager VanEck’s plan for a fund tied to bitcoin until late December. In August, the regulator rejected nine bitcoin funds. But that hasn’t stalled ambitions at some crypto firms to explore new fund ideas in the short term, The Block has learned.

    BlockForce Capital

    BlockForce Capital, the firm behind one of the first funds tracking companies in the blockchain space, is one firm kicking the tires on a crypto ETF, chief executive Eric Ervin told The Block in an interview. The company, formerly known as Reality Shares, operates a cryptocurrency hedge fund and is also developing a number of products aimed at retail investors, including a robo-adviser offering. It captured financial headlines with the launch of its blockchain fund in January 2018.



    Ervin said he is considering a number of options for a crypto fund. In recent weeks, the former Morgan Stanley financial adviser has spoken with folks at leading investment banks as well as at Bakkt, the cryptocurrency trading platform devised by ICE, the parent company of the New York Stock Exchange, about a fund. Ervin is taking a creative approach to get a fund off the ground, exploring a wide range of options outside the usual bitcoin futures and bitcoin-based funds.

    [Related: “Bitcoin and the NYSE — Unpacking Bakkt’s Big Plans”]

    Market observers once thought a futures-based fund, one that tracks the derivatives trading on CME and Cboe, would have a better chance of approval since futures trade on regulated exchanges; but regulators still have expressed concerns about those products being subject to manipulation. One setup Ervin is looking at, for instance, is an ETF made up of a basket of derivative products tied to crypto.

    “It could include both Cboe and CME’s futures, as well as notes that trade on exchanges in Europe, and possibly Bakkt’s proposed physically delivered futures,” he said. “The diversification of the product could remedy concerns of manipulation.”

    Bitwise Asset Management, a California-based firm, is also betting diversification will be the key to approval. It has a proposed fund that will track a basket of 10 cryptocurrencies. Still, regulators likely won’t approve any type of fund linked to the spine-tingly volatile market until they are comfortable that crypto exchanges are properly stomping out manipulation, some say.

    “The SEC has been very clear in the prior crypto ETF rejections – they won’t approve a crypto ETF until proper surveillance measures in the spot market have been put in place,” Joe Saluzzi, the co-founder of New Jersey broker Themis Trading, said in an interview. “Also, in light of the recent NY AG report which details the lack of surveillance at some of the biggest crypto exchanges, it is highly unlikely that the SEC will approve a crypto ETF any time.”

    [Related: “Another Bitcoin ETF Proposal Coming Soon: If Nothing Has Changed, Why Keep Trying?”]

    To be sure, some exchanges have taken steps to ramp up their market manipulation surveillance. Gemini partnered with Nasdaq to use its technology to monitor the exchange’s venue for spoof trading and other nefarious trading activities, for instance. Still, as noted by the New York Attorney General’s digital asset report, many markets, including Bitfinex, Bitstamp, and bitFlyer, have no formal policy for addressing manipulation.

    “Digital asset trading platforms need to utilize market-standard trading surveillance tools such as Nasdaq’s SMARTs technology to get institutional investors comfortable,” Gabor Gurbacs, head of digital asset strategy at VanEck, told The Block.

    Blockchain and Coinbase

    Elsewhere, two crypto-first companies are looking to enter the market, according to people familiar with the situation.

    Blockchain, the wallet company, is considering a co-branded exchange-traded fund product tied to crypto, a person familiar with the situation told The Block. To build the product the firm would partner with a well-established fund issuer. To be sure, the product is not a high priority for the firm, the person said.

    Coinbase also has ambitions to build a crypto ETF, as Business Insider reported in September. In March, Coinbase announced an index fund of cryptocurrencies aimed at accredited investors. The ETF would also most likely track the numerous cryptos listed on Coinbase, not just bitcoin, according to a person familiar with Coinbase’s plans.

    What an ETF could do for bitcoin’s price

    A bitcoin ETF could have a big impact on the crypto’s price, some market observers argue. JPMorgan, for instance, said the trading of a pure bitcoin fund could have a similar impact on bitcoin’s price that the first gold ETF had on the price of the precious metal.

    “Launched in 2004, SPDR Gold Shares ETF was the first gold ETF approved in the US by the SEC,” the bank said in a note to clients. “Since its launch, retail access to gold has skyrocketed as new investors more easily turn to the gold market as a portfolio diversifier and as a foundational asset.”

    After the launch of the SPDR fund, the price of gold skyrocketed from $440 to a peak of $1,900 in 2011, the bank said. The first crypto fund to launch could benefit from a similar first-mover advantage. SPDR Gold Shares ETF is one of the largest funds on the market, with approximately $35 billion under management.

    From TABB
     
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