Bitcoin Exchange Traded Funds in the U.S. – The Next Frontier for Crypto

2020 has been a phenomenal year for crypto so far, with bitcoin overtaking gold as the year’s top investment[1]. Paypal’s cryptocurrency announcement this month resulted in bitcoin passing the $12,000 mark[2]. On top of this, U.S. Bitcoin (BTC) Exchange Traded Funds (ETFs) may finally become a reality following a milestone announcement out of the US last week.

Last Week, Securities & Exchange Commission (SEC) Chairman Jay Clayton announced that the regulator is now interested in studying the investment rationale of listing bitcoin ETFs. It is a breakthrough announcement and comes alongside the recognition that crypto innovation and the SEC “got off on the wrong foot”. Mr Clayton also expressed a newfound willingness to collaborate and open the door to BTC ETFs by engaging in dialogue with the Office of the Comptroller of the Currency (OCC) and the Commodity Futures Trading Commission (CFTC).

While the SEC as an institution has previously exhibited caution in engaging with the crypto industry in facilitating its regulation, there has of course been strong internal voices supporting the SEC embrace of crypto, most notably from SEC Commissioner Hester Peirce, affectionately known as ‘CryptoMom’[3]. Mr Clayton’s remarks, however, represent a turning point: a new promise of collaboration, efficiency and a much-anticipated move for U.S. investing.

Taking a step back and examining trends in ETF and crypto markets in recent years, it is clear that the evolution of the SEC’s stance was not far from inevitable.

Global ETF Developments

The global pandemic precipitated a surge in interest in ETFs, and in particular, those within the digital economy and ecommerce spaces. News last week from China announcing the opening of its $157 billion ETF market, will now allow international investors to access a market that almost doubled in value in the first half of the year[4]. This year’s popularization of ETFs has also generated an explicit rise in the price of gold and silver due to the increased commodity access granted to institutional and retail investors[5]. Benefits such as access, cost, lower-risk investing and index fund diversification has meant that in the decade post the 2008 financial crisis, ETFs have grown from $530 billion to $4 trillion[6].

Looking to the crypto market, 2020 has seen several major developments in the ETF space. Last month, Bermuda approved a BTC ETF, a partnership between a Brazilian investment manager and Nasdaq[7]. September also saw the EU announce its plans to regulate crypto and speak of plans to implement a CBDC. During that time, Canada’s 3iQ’s BTC fund listed in Gibraltar[8]. The German stock exchange, Deutsche Börse’s Xetra, also revealed plans this year to list a BTC ETF which will be served by wallet custodian BitGo[9].

This flurry of BTC ETF activity across the globe has been at odds with the stifled BTC ETF progress in the US to date. The US has historically had a turbulent past when it comes to BTC ETFs. 2017 saw the denial of the Winklevoss Bitcoin Trust by the SEC. 2019 saw VanEck SolidX withdraw their proposal, an action mirrored by Bitwise in 2020. The SEC also denied Wilshire Phoenix’s proposal to launch a BTC investment trust earlier this year. These well-known instances are microcosmic of the long story of trial and rejection when it comes to BTC ETFs and the SEC. However, Mr Clayton’s comments of last week indicate a wholesale shift and a new frontier of possibilities for crypto ETFs in the U.S.

Crypto ETFs as an integral Component in the Future of Financial Markets

BTC ETFs could make investing in crypto much less complicated for those who wish to allocate their investments across a cross section of asset classes. For institutional investors, a huge benefit of BTC ETFs would be access to crypto without the burden of custody and high costs of security. Broadening the product offering on US exchanges and increasing the accessibility of crypto-asset investments will enable fund managers to increase their portfolio diversification and leverage crypto to hedge against cyclical risks with greater ease.
With the rapid expansion of the crypto derivatives market already underway, ETFs are the next logical advancement in the mainstreaming of the digital asset class. With formal regulation, ETFs will bring crypto into a fully-fledged ecosystem concomitant with the conventional financial ecosystem. The SEC Chair’s interest in reexamining the desirability of BTC ETFs in the U.S. could soon lead to a definitive evolution in the amalgamation of crypto and conventional finance. As the U.S. represents the world’s largest financial market the launch of BTC ETFs would be a critical juncture for the crypto industry globally.

[1] Ryan, Ciaran, “Cryptocurrencies outperform gold as 2020’s top investment”, MoneyWeb, 10.27.20
[2] Zimwara, Terence, “JP Morgan Sees Millennials’ Bitcoin Preference Over Gold as Foundation for Its Long Term Success”, Bitcoin.com, 10.25.20
[3] Partz, Helen, “SEC’s Cryptomom Proposes Safe Harbor Framework for Token Projects”, Cointelegraph 6.2.2020
[4] ETF Trends,” China Has Opened Its ETF Market to Global Investors”, Nasdaq,10.23.20
[5] Ramkumar, Amrith, “ ETF Boom Fuels Gold’s Sharp Rise,” Wall Street Journal, 08.23.20
[6] Horc, AJ, “Here’s why investors started pouring trillions into exchange-traded funds”, CNBC, 05.29.20
[7] Di Salvo, Matthew, “A Bitcoin ETF Finally Launches…in Bermuda”, Decrypt, 09.22.20
[8] Gogo, Jeffrey “Canadian Firm 3iQ’s Bitcoin Fund Listed on Gibraltar Stock Exchange”, Bitcoin.com, 30.09.20
[9] Malway, Shaurya “Germany’s stock exchange will list first “centrally cleared” Bitcoin ETF, BitGo to serve as BTC custodian”, Crypto Slate, 10.06.20