Cryptocurrency exchange traded funds are getting closer to becoming a reality, with SEC Chair Gary Gensler signaling in early August he’s open to approving Bitcoin ETFs. But here’s the catch: These funds would be futures-based Bitcoin ETFs rather than investment vehicles that directly track the cryptocurrency itself.
“Right now, we just don’t have enough investor protection in crypto,” Gensler said in comments before the Aspen Security Forum on Aug. 3. He compared the burgeoning cryptocurrency market to the Wild West.
He added that the U.S. regulatory agency would be receptive to futures-based Bitcoin ETFs rather than physical cryptocurrency assets if they follow a more stringent set of rules akin to mutual funds. A Bitcoin futures mutual fund from ProFund began trading on the Chicago Mercantile Exchange in July after garnering SEC approval earlier this year.
“As new technologies come along, we need to be sure we’re achieving our core public policy goals,” Gensler added. “In finance, that’s about protecting investors and consumers, guarding against illicit activity, and ensuring financial stability.”
Comments ‘Breath Of Fresh Air’ For Investors
Todd Rosenbluth, who heads ETF and mutual fund research at CFRA, called Gensler’s comments a “breath of fresh air” for Bitcoin investors. Analysts and crypto fans have noted the SEC chair’s outlook on cryptocurrency regulation to be more “negative” in the past, Rosenbluth said.
“This gives those that are seeking a Bitcoin ETF optimism,” Rosenbluth told Investor’s Business Daily. “But there’s still some unknowns that we’re trying to sort through.”
SEC Favors Futures-Based Bitcoin ETFs
In his remarks before the Aspen Security Forum, Gensler signaled his preference for futures-based Bitcoin ETFs rather than cryptocurrency-backed funds.
Futures contracts are traded separately from the underlying asset they are derived from and allow traders to bet whether an underlying market will rise or fall. While this disconnect can provide more risk management, it also can lead to significant differences in price value between the futures contract and the actual asset.
“There can and likely will be performance differences,” Rosenbluth said of futures-based Bitcoin ETFs.
A researcher with VanEck took this criticism one step further, saying futures-based Bitcoin ETFs are “inferior products” in an early August interview with Bloomberg.
Rosenbluth also cautioned investors to keep an eye on transaction fees and other charges related to futures-based products. “There’s costs that are related to each month rolling forward the futures to the next month,” he said. “That’s going to eat a bit into potential returns.”
Approvals Could Come By 2022
Crypto backers have been pushing the SEC for Bitcoin ETFs for the better part of a decade to no avail. But the market has matured and demand for more Bitcoin products has grown.
Rosenbluth says it’s conceivable to think that approval for futures-based Bitcoin ETFs could come by next year. “I don’t expect the SEC is feeling pressure to bring something to market,” Rosenbluth said. “I think they want to do it the right way.”
Until recently, money managers were not pursuing approval of futures-based Bitcoin ETFs. But that trend has reversed after Gensler’s August comments. Roughly a dozen asset managers have filed paperwork for futures-based Bitcoin ETF products. Major funds like ProShares, VanEck and Invesco filed applications within the last two weeks.
“The SEC does not want to play favorites,” Rosenbluth said. “They want enough of these firms that are willing to follow their rulebook to launch a product at the same time.”
MORE YOU MAY LIKE: