After the US Securities and Exchange Commission had previously been very critical of cryptocurrencies, SEC head Gary Gensler was recently surprised with confident statements about a Bitcoin ETF. According to the investment company Grayscale, however, the regulators’ ideas hold several pitfalls.

US Securities and Exchange Commission at odds with crypto market

The US Securities and Exchange Commission (SEC) controls the trading of securities in the US. In the past, however, the institution also repeatedly counted trading in cryptocurrencies such as Bitcoin and Ether among its areas of responsibility. Since the former head of the Commodity Futures Trading Commission, Gary Gensler, who is considered rather hostile to cryptocurrencies and the entire crypto industry, became chairman of the state authority in April 2021, the conflict between the SEC and the crypto market increased. For example, the market watchdogs accused Ripple Labs, the main operator of the cryptocurrency XRP, of violating securities regulations and therefore filed a lawsuit without further ado. The company behind the digital asset had, according to the SEC, partially financed its core business with the sale of XRP. The dispute is entering a hot phase, as more and more accusations of fraudulent dealings by the SEC are becoming louder and louder, and the burden of proof is mounting against the market watchdog.

Numerous applications for Bitcoin ETFs

The efforts of numerous asset managers to bring the trend around Bitcoin and Co. into the fund business are growing stronger and stronger. As the news agency Bloomberg reports, at least 14 companies have applied to the exchange authority for an ETF that tracks bitcoin. So far, however, all applications have been rejected, their processing postponed or no decision taken at all.

Commitment for Bitcoin ETF - on a futures basis

In the meantime, the SEC has publicly come out to support an exchange-traded Bitcoin fund. Still, according to the authority, this should be based on Bitcoin futures and not on the underlying asset itself, as Gensler explained in August. This was met with criticism – particularly from Michael Sonnenshein, CEO of investment firm Grayscale, which manages the world’s largest listed Bitcoin fund. “It is perhaps short-sighted of the SEC to rely on futures-based products rather than spot,” the group leader told “MarketWatch”. An application has also been filed with the regulator for the Grayscale Bitcoin Trust. The investment company wants to convert the trust into an ETF; it currently has a security status.

Protection against high volatility

Gensler’s bias towards futures-based ETFs may not come as a surprise given his previous CV; after all, he headed the agency that regulates the futures and options markets. Accordingly, he reasons that futures-based crypto ETFs could offer better investor protection for average buyers, as the cryptocurrency market is well-known for its high volatility. For example, according to the SEC chief, Bitcoin ETFs should be structured under the Investment Company Act of 1940, whose guidelines are typically applied to mutual funds and provide greater safeguards for investors. For example, in case of doubt, the raising of new money for a fund could be stopped, MarketWatch reports.

Futures ETFs could cost investors dearly

Sonnenshein, however, is sceptical about mapping Bitcoin futures. For example, futures contracts could offer indirect ownership of bitcoin, which would mean that the end-user would have to expect additional costs. However, using the spot market, whose quotes refer to the immediate fulfilment of the trading contract, could mitigate these fees, as he explains to the portal.

For Sonnenshein, Gensler’s clear commitment to the futures market is, therefore, more than questionable. The Grayscale CEO raises the question with MarketWatch whether the SEC is not going beyond its investor protection function by focusing on one type of product. As he told a Yahoo Finance crypto conference, David LaValle, managing director and global head of ETFs at Grayscale, also doesn’t think futures and spot ETFs are mutually exclusive. “We think the SEC should really take a fair approach to allow investors to choose the type of Bitcoin exposure they want in the form of an ETF,” LaValle said.

Comparison with gold ETF

The Grayscale boss would also like to see the authority model Bitcoin ETFs on exchange-traded funds such as the SPDR Gold Shares. The gold ETF, managed by S&P subsidiary SPDR, tracks the price of a tenth of an ounce of gold and allows shares to be exchanged for whole ounces of gold bullion on a one-for-one basis. With a value of almost 56 billion US dollars, the gold fund is one of the largest ETFs ever. This is an indication that “the Bitcoin ETF scenario is more reflective of what has occurred for gold compared to similar commodities like oil, because Bitcoin is easy to store”, Sonnenshein continues.

The advantage of crypto funds is clear for LaValle: “Bitcoin can be a bit of a challenge for a lot of investors in terms of how they can seek exposure to this asset class or reliably hold it and have part of their investment portfolio in this asset class,” the ETF chief said at the conference. “I think the ETF opens up the pool to a much wider investment universe.”

Grayscale could benefit massively from a spot-based bitcoin ETF, MarketWatch points out. By converting the trust, the company aims to maintain its supremacy in the crypto market, according to the report.

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