A California-based asset manager has figured out a way to sneak bitcoin in an exchange-traded fund, and the CEO says it’s the best way to get a crypto fund approved by the Securities and Exchange Commission.
Reality Shares, the firm behind one of the first ETFs to track the blockchain market, filed a prospectus to list a fund of currencies, which would include exposure to bitcoin futures. If approved, it would be the first fund to offer direct exposure to the spine-tingling cryptocurrency market. It would list on NYSE Arca, an exchange operated by the New York Stock Exchange.
Per a final draft of the fund’s prospectus, the ETF is actively managed to “provide investment exposure to global currencies, both fiat and virtual currencies, that have been widely adopted for use.” To that end, the fund would potentially invest up to 15% of its total assets in bitcoin futures trading on both Cboe Global Markets and CME Group. It could also invest in contracts trading on other bitcoin futures marketplaces at some point, the prospectus noted. In addition, the fund will invest in sovereign debt instruments tied to British Pounds, Japanese Yen, Swiss Francs, and money market mutual funds.
“The SEC doesn’t want to approve a full blown crypto ETF but this limits exposure to 15%,” Eric Ervin, chief executive officer of Reality Shares told The Block. Reality Shares launched its blockchain fund, which tracks different companies involved in the nascent market, at the beginning of 2018.
The SEC has rejected a number of funds tied to bitcoin, crypto, and bitcoin futures, citing fears of manipulation in the spot market as well as a lack of liquidity. The idea of the new fund is that the limited exposure to bitcoin will make regulators more comfortable with approving the product. Still, it notes — extensively — the risks associated with bitcoin investing. A bitcoin ETF has been a darling of the market as many think it would provide an onramp for retail investors to dive into the nascent asset class.
“Bitcoin exchanges have a limited history,” the prospectus reads. “Since 2009, several bitcoin exchanges have been closed or experienced disruptions due to fraud, failure, security breaches or distributed denial of service attacks a/k/a “DDoS Attacks.”
In a January 2018 letter, SEC Commissioner Dalia Blass noted the agency’s concern about listing a fund tied to bitcoin futures, citing issues with crypto exchanges. “In addition, a number of recent media reports have highlighted a range of possible vectors for potential manipulation of cryptocurrency markets,” the letter said. “Although some funds may propose to hold cryptocurrency-related products, rather than cryptocurrencies, the pricing, volatility and resiliency of these derivative markets generally would be expected to be strongly influenced by the underlying markets.”
Elsewhere in the market, asset managers are hoping their purer bitcoin funds have a chance at getting approved.
VanEck, a New York-based asset manager, refiled its bitcoin ETF proposal earlier this month. The so-called SolidX Bitcoin Shares ETF, which is a collaborative effort by asset manager VanEck and SolidX, was filed to list on Cboe, a Chicago exchange operator, in 2018. The application was pulled during the partial U.S. federal government shutdown a few weeks before it would have faced a verdict from the Securities and Exchange Commission on its listing. Bitwise, another California asset manager, filed to list its own crypto exchange-traded fund to offer exposure to the ten largest cryptos in January.
Gemini’s Winklevoss twins confirmed their commitment to getting a bitcoin ETF off the ground during an Ask Me Anything on Reddit. The twins, who tried to get a fund tracking bitcoin approved in 2017, said they “are committed as ever to making an ETF a reality,” according to a CoinTelegraph report.
There is some hope for issuers. As per a report by CoinDesk, SEC Commission Robert Jackson said that a bitcoin ETF proposal will eventually meet the agency’s requirements.
“I’m happy to say market participants have begun to come in with ideas. Whether or not we’re going to find one that really protects investors I don’t know, but I do know that that [Winklevoss] case wasn’t especially close,” Jackson said.