To date, several ETF managers have applied for approval of ETFs (Exchange Traded Funds) that will invest in Bitcoin. Most of these applications have been withdrawn at the request of the regulators. Meanwhile, industry insiders are still adamant that we will indeed see Bitcoin ETFs soon. So, what’s actually going on?
Potential For Mass Adoption
Cryptocurrency ETFs could potentially boost the industry in two ways. Firstly, investors who don’t want to directly own digital assets, or digital wallets, but have a stock trading account, will be able to invest.
Secondly, if an ETF is approved in the US, it will amount to tacit regulatory approval of digital currencies – which will likely serve as a driver for the mass adoption breakthrough that the crypto-community has been anticipating for a number of years now.
Most commentators agree that that both exchanges and regulators in the US are feeling some pressure. Whilst they would probably like a little more time before these products are launched, further delays incur the risk of losing future market share to another financial centre.
Toronto-based Evolve Funds, for instance, has already filed a preliminary prospectus to launch a Bitcoin ETF in Canada which, according to some analysts, carries a higher probability of approval than its previous US-based equivalents had been exposed to.
Two Likely Routes to Approval
Currently ETFs can only invest in financial assets – however, since cryptocurrencies are not presently classified as a financial asset, this only leaves two possible current routes for a crypto-based ETF to becoming a reality:
Firstly, any kind of futures contracts is classified as a financial asset, so an ETF that invests in Bitcoin futures would qualify for approval. In theory approval of such an ETF would only be a formality.
The alternative route would be for cryptocurrencies to be classified as financial assets. This may take longer as it would require co-operation between several agencies at government-level. For this reason, most Bitcoin-based ETFs currently being filed are being done so with futures instruments.
In August of this year, the Chicago Board Option Exchange (CBOE) announced its intention to launch a cash-settled future on Bitcoin, either in the fourth quarter of 2017 or early next year. The Chicago Mercantile Exchange (CME), said in September that they were unlikely to follow suit.
They have, however, now changed their mind and plan to launch Bitcoin futures by the end of the year, pending regulatory approval.
So, Bitcoin ETFs may well be approved anytime between now and March next year. However, this should not be considered as a certainty at this stage as the regulatory environment, as it has proven many times before, is a little more complicated than that.
Both the CBOE and CME are exchanges which are regulated by the CFTC (Commodity Futures Trading Commission), but don’t actually need approval from the body to launch a new contract. The fact that they are seeking approval underlines the uncertainty surrounding the subject.
If, on the other hand, these contracts are in fact launched, it could only be a formality from there for the SEC to approve ETFs. That, of course, will be if they are happy to approve them. It is entirely conceivable that they may choose not to do so and, if so, they will be able to delay the process for any number of reasons.
Powerful lobby groups situated inside the ecosystem of traditional finance may not approve of such a move and are in a position to exercise considerable influence over the SEC’s eventual decision. In that scenario, this would likely end up with a legal challenge which the ETF issuers may well win – but the process would take months or even years.
So, while in theory we may see Bitcoin ETFs trading within six months, if the general consensus amongst the big banks and exchanges is to prevent this kind of development, we could be looking at a matter of years for an eventual breakthrough.