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Spot bitcoin ETFs are known to make people happy, angry, perplexed, nonchalant, cynical, disdainful, curmudgeonly and hucksterish. Now that these products are legal in the US for adults to use, we need a frank and honest conversation about responsibility.
First, the recap: one day after the SEC’s comms hiccup and/or hack — and months after a court rebuke for previous denials — the US securities regulator approved listing 11 exchange-traded funds based on spot bitcoin. Previously it had only approved ETFs based on bitcoin futures, as the futures market has a defined regulatory regime (however dysfunctional).
SEC Chair Gary Gensler published a statement Wednesday about the decision to approve Bitcoin ETFs:
Importantly, today’s Commission action is cabined to ETPs holding one non-security commodity, bitcoin. It should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities. Nor does the approval signal anything about the Commission’s views as to the status of other crypto assets under the federal securities laws or about the current state of non-compliance of certain crypto asset market participants with the federal securities laws. As I’ve said in the past, and without prejudging any one crypto asset, the vast majority of crypto assets are investment contracts and thus subject to the federal securities laws . . .
Since 2004, this agency has had experience overseeing spot non-security commodity ETPs, such as those holding certain precious metals. That experience will be valuable in our oversight of spot bitcoin ETP trading.
Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.
While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.
To summarise the overall gist: sure, they’ll approve spot bitcoin ETFs, but they won’t be happy about it. And please do not even start with them about Ethereum ETFs right now.
In that spirit . . . readers, let’s talk.
Some of you will probably want to experiment with these products, maybe because your friends on TikTok say trading spot crypto will give you a rush and alter your state of mind. It’s naive to think repeated warnings from authority figures of varying influence (Gary Gensler, Andrew Bailey, the FT editorial board, Unhedged, FT Alphaville) will keep you away.
While you learn your limits, we’d encourage you to experiment under the roof of the US securities regulator, through ETFs. And we want to make sure you have the information and resources to make thoughtful decisions about your cryptocurrency ETF use.
Click here to find our full spreadsheet that’ll be updated over time. For now, it includes information on the ETFs and their service providers. We’ll add the first trading day’s premium/discount to NAV when the data becomes available.
(Note: Hashdex isn’t included here because it hasn’t yet converted its futures ETF to a spot ETF. It had to correct its own press release Thursday, saying it “does not hold spot Bitcoin in its portfolio. At a later date, the fund will change its name and change its investment strategy to permit spot bitcoin in its portfolio,” pending “a registration statement that is currently under review” with the SEC.)
We should explain a few things in the table above. Like, what’s the difference between the traditional ETF market-maker — the “Authorised Participant” (AP) — and a “Liquidity Provider”? And what’s the deal with the Coinbase lending agreements?
That “liquidity provider” category exists because APs aren’t allowed to buy and sell bitcoin. (The SEC has not given explicit approval for broker-dealers to trade crypto, it seems.) So they’ll have their APs making “cash orders”, with separate “Liquidity Providers” buying and selling the cryptocurrency on their behalf. It won’t be necessary if or when regulators allow broker-dealers to trade bitcoin.
Speaking of middlemen, it’s interesting that the initial bounce in Coinbase shares didn’t last, because as far as we can tell, it has established a nice little business acting as a one-stop shop for ETF sponsors. It’s a custodian for all but two of the ETFs above.
More notably, it’s also acting as a prime broker and/or liquidity provider to many of the ETFs. Part of that service is also providing short-term loans to cover cash needs for creations or redemptions that may not be immediately covered by cash. (It isn’t obvious how much of this will be needed if the SEC allows APs to trade bitcoin, so maybe that’s behind the selloff?)
Fidelity’s bitcoin ETF is also notable because it cuts out most of the middlemen and instead relies on its own specialised bitcoin benchmark and has a subsidiary to act as its own custodian. After all, as the other providers’ somewhat elaborate trading arrangements show, holding bitcoin is far from free or easy (which from the investor’s perspective is a big argument in favour of ETFs).
And what about custody risk? Well it looks like Coinbase has worked out a system that’s at least less risky than the FTX “not your keys not your coins” model. To oversimplify a bit, it looks like Coinbase will keep coins in segregated accounts unless they’re needed for liquidity, whether for creation/redemption or payment of fees. At that point Coinbase will transfer the bitcoin into a trading account; once that happens, they’ll be pooled with its other clients’ assets and the fund won’t have a direct legal claim on them if something goes wrong.
Anyway! To bring it back to our precious-metals ETF comparison, some providers might eventually decide to invest in derivatives that correlate spot bitcoin instead of worrying about holding the real thing, with all of its keys and hot and cold storage and whatnot. See the entire (fairly popular) category of gold-miner ETFs.
So it’ll be fun to see what other types of creative price-replication structures bitcoin-tracking ETFs come up with. Anybody trading Texas power prices?
. . .
That said, we will leave readers with one last request. Please, please don’t post anything online while trading spot bitcoin ETFs. It makes the world less safe for everyone.
