Exchange-traded fund managers keen to cash in on frantic cryptocurrency trading are gearing up for a longer-than-expected regulatory review after comments from Securities and Exchange Commission Chairman Gary Gensler dampened hopes of early approval of Bitcoin ETFs this year.
In testimony before the House of Representatives financial services subcommittee last week, Gensler said: “There are many challenges and gaps in investor protection in [crypto] markets ”. He added that “none of the crypto token exchanges have yet registered as exchanges with the SEC.”
This wasn’t the first time the SEC chairman has raised concerns about lax oversight, and his stance signals industry insiders that the agency wants to try to place cryptocurrencies more heavily under his authority. regulation before approving a list of a dozen bitcoin ETF applications from Fidelity, WisdomTree, Wilshire Phoenix, VanEck and First Trust SkyBridge. A small but growing amount of ethereum ETFs are joining the waiting game, following requests for SEC approval by VanEck and WisdomTree in May.
The SEC has rejected some earlier bitcoin ETF applications and recently delayed a decision on another: its decision on VanEck’s filing will now come no earlier than June, the agency said on April 28, hours before the date. previous limit.
“I’m waiting for this [delay] this will happen with all of our deposits, to be honest, ”said Laura Morrison, global head of listings at Cboe, whom many crypto ETFs have chosen as their exchange.
Originally, crypto enthusiasts were encouraged by Gensler’s appointment, given that he had taught blockchain technology classes at the Massachusetts Institute of Technology while not in government, but he recently called for “greater investor protection” in bitcoin in particular. The SEC’s investment management division has also issued a warning to investors about the risks of the crypto market.
Both stocks dampened optimism in the largely unregulated $ 2 billion asset class. While the Commodity Futures Trading Commission regulates cryptocurrency futures contracts, spot exchanges such as Coinbase or Kraken have less oversight.
“[Gensler] wants to see regulation there, and if that happens, it looks like that’s what the SEC needs to approve a bitcoin ETF, ”said Craig Salm, vice president of legal at Grayscale, who runs a bitcoin trust that is traded – over the counter.
An executive from a fund management group that studies crypto investing said Gensler likely sees the bitcoin ETF approval process as a way to get more oversight and regulation over crypto exchanges in general.
Gensler’s warning is shared on Capitol Hill, where senior lawmakers, such as Democratic Senators Sherrod Brown and Elizabeth Warren, have said the SEC should take care before approving cryptocurrency ETFs.
Still, some fund managers remain optimistic.
“We have a half-full view of the state of cryptocurrency regulation,” said Jan van Eck, Managing Director of VanEck. “Those who oppose a bitcoin ETF are effectively forcing investors to move to inferior fund structures and less regulated venues.”
The backlog of crypto ETF approvals has not stopped investor demand for bitcoin exposure through various market proxies. These include the grayscale trust and stocks of MicroStrategy, a software company that owns around $ 4.5 billion in cryptocurrency, as well as Bitwise’s Crypto Industry Innovators ETF, which owns companies such as Coinbase. This growing market for bitcoin exposure would thrive in the absence of formal ETF approval.
The fate of applications for bitcoin ETFs depends on whether the SEC believes they have adequate protections for investors, given that cryptocurrency prices are volatile and deemed vulnerable to fraud and fraud. handling.
“Given recent comments from SEC staff and the president, it is reasonable to assume that asset managers are seeking to convince the regulator that the proposed funds will cover risks for investors,” said Todd Rosenbluth, head of research on mutual funds and ETFs at CFRA.
“The regulatory approval process for a US bitcoin ETF appears to focus on whether they are comfortable with the risks associated with bitcoin in a fund and whether the fund could grow too large to cope with the lack of liquidity in the market. ‘
Fund providers are working on their crypto ETF applications to address regulatory concerns. Bitwise, which initially filed for regulatory approval for a bitcoin ETF in 2019 before withdrawing the request after an initial rejection, has been revising its filing for over a year.
“We have worked on various ways to demonstrate that the market has matured enough to satisfy staff concerns,” said Matt Hougan, its chief investment officer.
Regulators in other countries have approved bitcoin ETFs, freeing more than $ 1 billion in global inflows. The Canadian Purpose Bitcoin ETF, which began trading in February, reached over $ 1 billion in assets under management in less than two months. In Europe, several exchange traded products are listed in Germany and Switzerland.
It is not uncommon for US regulators to take years to approve new ETFs. Still, the crypto crowd has been frustrated with the long process.
“Crypto lives in the dog years,” Bitwise’s Hougan said. “A week in the crypto market is like a year in the capital markets.”