The advent of bitcoin futures trading in late 2017 was supposed to signal the arrival of cryptocurrency exchange-traded products in the U.S. Now, some four years later, a host of U.S. asset managers sit watching global crypto exchange-traded funds find their footing while their home market is stuck in neutral.
Over the past few weeks, the U.S. Securities and Exchange Commission has denied the critical last step for a handful of bitcoin ETPs while delaying judgment on others, including the conversion of the $21.1 billion Grayscale Bitcoin Trust into an ETF. In issuing lengthy rebuttals to proposed 19b-4 rule changes, which allow securities exchanges to list and trade shares of ETPs that fall outside of the ETF rule, the SEC has picked apart filings based on its concerns regarding market surveillance, pricing and investor protection.
To be sure, the SEC stood by as three ETFs holding bitcoin futures came to market in the fall. Each product fit within the bounds of the ETF rule, the largest of which is the $1.1 billion ProShares Bitcoin Strategy ETF. Listed on Oct. 19, the fund has an expense ratio of 0.95% and sees average daily volume of $217 million, according to FactSet Research Systems Inc.
"BITO's returns have moved in line with those of bitcoin," said Simeon Hyman, global investment strategist and head of investment strategy at ProShare Advisors LLC. "The fund has provided a convenient way for investors to incorporate this emerging digital asset into their portfolios."
But moving from futures to spot crypto exposure is where the hang-ups lie. Where asset managers see structural similarities to funds that hold physical commodities such as gold and silver, regulators see underlying assets that are volatile and stateless.
In remarks before the Aspen Security Forum in August, SEC Chairman Gary Gensler flaunted his crypto bona fides and, in the same breath, pointed out that "large parts of the field of crypto are sitting astride of — not operating within — regulatory frameworks."
That reality carries through in how the SEC engages with the crypto community: thorough in its evaluation of legitimate products while also frequently bringing settlements with bad actors.
Yet, an October 2021 National Bureau of Economic Research working paper by Igor Makarov, associate professor of finance at the London School of Economics, and professor Antoinette Schoar of the MIT Sloan School of Management argues that "illegal transactions, scams, and gambling together make up less than 3% of volume" in bitcoin. Still, "the wider the adoption of bitcoin is … the more attractive it will become for malfeasance and shadow economy," the authors warned.