Bitcoin is a revolutionary technology, but it’s still not quite there yet.
Almost but not quite meaning is a phrase that is used to describe something that is close, but not quite there. In this case, the almost but not quite meaning would be an app that has potential, but needs some work before it can reach its full potential.
The chances of the SEC approving a Bitcoin (BTC) exchange-traded fund (ETF) before a physical Bitcoin ETF are greater than ever, according to Chairman Gary Gensler’s now-repeated preference for the former.
But here’s the problem: an ETF based on crypto futures isn’t the most efficient, cost-effective, or straightforward option. Products with a physical backing are. They’re expected to draw more assets and bring new investors into the crypto industry. They’re also considerably simpler to comprehend for investors.
This is why, rather than racing to be the first to market with the more complicated and costly futures-backed product, fund issuers should ask the SEC for clarification on what is required to have the Bitcoin spot ETF authorized.
The structure is full, but the rationale isn’t.
One of the main reasons in support of a crypto futures ETF is that, unlike actual crypto assets, the regulatory environment for futures is clear and well established at this time.
Futures are regulated by the Commodity Futures Trading Commission. Contracts are all the same. There are no digital wallets required for Chicago Mercantile Exchange (CME) futures, and the lack of a tangible asset means there are less concerns about crypto custody. Because there is no decentralized asset that can be transferred from one address to another, Know Your Customer is less of a problem. Futures markets are, on average, more tightly regulated and supervised than spot markets.
The Empire Strikes Back: The New Episode of Crypto Regulation
The 1940 Investment Company Act would be used to register these futures-backed ETFs. As a result, they’d be considered “liquid alternatives,” allowing them to invest in more complicated products or strategies. As ’40 Act funds,’ mutual funds, including those with hedge fund-like strategies, are registered.
What are the advantages of registering Bitcoin futures ETFs as ’40 Act funds’? They are exempt from numerous regulatory requirements, thanks to their obligation to invest mainly in futures published on a regulated U.S. exchange like the CME.
Futures have become more complicated.
Granted, simplicity is beneficial, particularly when the goal is to attract fresh money that has been sitting on the sidelines patiently. Futures, on the other hand, by their very nature add additional complexity, which goes against the purpose of ETFs in the first place.
ETFs were created to be a less expensive and more liquid alternative to actively managed funds. Futures, on the other hand, aren’t very cost-effective. They demand a disproportionately large amount of margin as collateral compared to other asset types.
Furthermore, trading volumes on US-regulated exchanges are modest, with the majority of the activity taking place overseas. This raises the issue of whether SEC-approved exchanges like the CME will have adequate liquidity to satisfy demand, particularly during times of extreme volatility.
In reality, in addition to Bitcoin futures contracts, this initial generation of futures ETFs will most likely be made up of a basket of various assets. To hold these assets, a subsidiary must be established, usually in a low-tax country like the Cayman Islands, owing to tax and asset diversification complications. Of course, more complexity implies higher expenses for investors.
There’s also the problem of price differences between futures and spot. Futures contracts do not precisely follow the underlying assets. In the case of Bitcoin, there may be significant differences between the anticipated price of Bitcoin in 30 days (as represented by a futures contract) and the actual price when that date arrives. A rolling position in Bitcoin futures lagged the price of Bitcoin by 38 percentage points for the year ending September 2, 2021. (295 percent to 333 percent , respectively).
Finally, it’s worth noting that investor demand for futures-based ETFs has traditionally been lower than for spot ETFs. For example, the biggest gold spot ETF presently has more over $50 billion in assets, whereas the largest gold futures ETF has just around $40 million.
Related: Could a Bitcoin futures EFT enthrall American investors?
This is a decent first step in the correct direction.
But does this imply that a Bitcoin futures ETF is more harmful than beneficial?
Certainly not. A Bitcoin futures ETF, although not as easy or cheap as a spot ETF, is nevertheless a step in the right direction for providing potential investors with access to crypto.
It will make crypto investing more accessible to a wider range of investors. Financial advisers and others will find it much simpler to incorporate Bitcoin into their portfolios and regular procedures thanks to the ETF format. It will also include all of the 1940 Act’s investor safeguards. Many investors’ worries will be alleviated by the SEC’s strict supervision of ’40 Act funds, which would put governance checks on fund management.
Ethereum ETFs are now available, bolstering the argument for BTC and ETH funds to be approved in the United States.
Given the SEC’s recent harsh language and negative attitude on cryptocurrency, the approval of a Bitcoin futures ETF would be a major step forward. It would demonstrate the SEC’s readiness to allow crypto asset products to join the market with a regulatory supervision wrapping, easing recent worries about government overreach.
However, the success of these funds should not divert issuers’ attention from their main goal: establishing the clarity required to get a spot Bitcoin ETF authorized with the SEC and other authorities.
Although the procedure would be long, the end result would undoubtedly be rewarding. It would finally provide investors with a low-cost, highly liquid vehicle to precisely monitor Bitcoin, allowing them to better match their crypto investments with their entire portfolio. This, we think, will eventually usher in a new, significant wave of assets that industry proponents, investors, and issuers alike have been waiting for.
There is no financial advice or suggestion in this article. Every investing and trading choice has risk, and readers should do their own due diligence before making a decision.
The author’s views, ideas, and opinions are entirely his or her own, and do not necessarily reflect or represent those of Cointelegraph.
Katherine Dowling is the general attorney and chief compliance officer of Bitwise Asset Management, a crypto asset management firm that manages over $1 billion in assets. She formerly worked at True Capital Management and Luminate Capital Partners as general counsel and chief compliance officer. Katherine worked as an Assistant United States Attorney for over a decade, most recently in the Economic Crimes Unit of the United States Attorney’s Office for the Northern District of California.
The almost but not quite meaning in tagalog is a cryptocurrency that can be purchased with Bitcoin, Ethereum, or Litecoin.
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