While some industry analysts believe the SEC will approve a bitcoin futures ETF in the fourth quarter of this year, Grayscale Investments’ head of ETFs is urging the SEC to also approve a spot bitcoin product.
The New York-based company has previously stated that it intends to convert the Grayscale Bitcoin Trust (GBTC) into an ETF. The investment product currently manages $30 billion in assets.
“A bitcoin futures ETF approval should occur concurrently with a spot bitcoin ETF approval,” David LaValle explained. “We simply believe it should be a level playing field, which will ultimately allow our investors to make an active decision on how they want to seek bitcoin exposure in the form of an ETF wrapper.”
While Bloomberg Intelligence analysts predict SEC approval of a futures-based bitcoin ETF as early as October, they added last week in a research note that, based on recent comments from SEC Chairman Gary Gensler, GBTC has no chance of converting to an ETF anytime soon. The authors of the note, James Seyffart and Eric Balchunas, described a bitcoin futures ETF as the “worst-case scenario” for Grayscale’s product.
“The inability to convert for an extended period of time, combined with potential competition from newly launched futures-based Bitcoin ETFs, could erode demand for GBTC and widen its discount,” wrote Seyffart and Balchunas. “Risks may be increased if fees for the new ETFs are half of GBTC’s 2%.”
Gensler previously stated that his agency would “look forward” to reviewing ETF filings that only invest in bitcoin futures contracts. During a virtual forum last month, Gensler hinted that the SEC would prefer ETFs filed under the Investment Company Act of 1940, also known as the ’40 Act, which he said “provides significant investor protections.”
The GBTC conversion would be filed under the Securities Act of 1933, according to LaValle, the former CEO of Alerian who joined Grayscale last month. He did, however, point out that the firm could implement some of the ’40 Act’s safeguards, such as having a board of directors comprised of independent members.
Grayscale’s ETF head added that bitcoin futures and ETFs that invest in them are still based on the underlying spot market.
“Futures-based ETFs are inferior to spot-based ETFs,” LaValle said. “They incur additional costs, increase operational complexity, and introduce uncertainty into the return profile.” And it is for these three reasons that you haven’t seen futures-based ETFs… gain assets as favorably or strongly as spot ETFs in other asset classes.”
A bitcoin ETF based on futures contracts is constantly buying and selling contracts, which can cause returns to decay when the futures curve is in contango, according to Seyffart and Balchunas in their note.
The SPDR Gold Trust (GLD) of State Street Global Advisors and the iShares Gold Trust (IAU) of BlackRock have approximately $58 billion and $29 billion in assets under management, respectively. Meanwhile, the Invesco DB Gold Fund (DGL), which tracks an index of gold futures contracts, has assets worth $83 million.
Bitcoin futures vs. exchange-traded funds (ETFs) on the spot market
SEC Commissioner Hester Peirce, who previously stated that the agency should have approved a bitcoin ETF by now, stated in an interview with ULTCOIN365 that the delay is harming investors who want regulated exposure to the asset class.
She went on to say that physically backed bitcoin ETFs and bitcoin futures ETFs are two very different types of products, and that demand for the latter has yet to be determined.
“We’ll see how they work, how expensive they are, and so on,” Peirce said. “… I’m not making a decision one way or the other. It may be a more appealing product to some and a less appealing product to others.”
Following Gensler’s comments, Invesco and ProShares were the first to file for futures-based bitcoin ETFs, and VanEck, Valkyrie, and Galaxy Digital followed suit.
More than a dozen ETFs that would directly invest in cryptocurrency are awaiting regulatory approval, with some firms having had pending applications for years. According to a document published Wednesday, the SEC has once again delayed its decision on whether to approve or deny the VanEck Bitcoin Trust, pushing the date back to at least November 14.
Peirce stated that she does not know when the SEC will consider approving a spot bitcoin ETF or a bitcoin futures ETF, or whether they will consider approving both at the same time.
“I’m trying to get inside my colleagues’ heads to understand what they’re looking for in terms of a spot bitcoin [exchange traded product] approval,” Peirce said. “… You’re speaking to someone who has been perplexed by the agency’s approach to these issues throughout my entire tenure at the agency.”
Following the announcement of bitcoin futures ETF filings, VanEck and ProShares announced plans to launch Ethereum futures products. Following that, both fund managers withdrew their applications for the proposed ETFs.
According to industry observers, the SEC most likely informed the issuers that such products would not be approved anytime soon.
“A couple of people have come in, and there are ETH-based products in other jurisdictions as well, so there is some experience with them, but not much,” Peirce said. “I believe we have been focused on what most people have brought to our attention, which has so far been bitcoin-based products.”
What are the next steps for Grayscale?
LaValle told ULTCOIN365, “We will not convert GBTC into a futures-based product.” “We believe it disadvantages investors.”
LaValle went on to say that the approval of a futures-based ETF before GBTC can convert would have an impact on more than just Grayscale clients and investors, noting that ETFs and mutual funds hold shares of the trust as a way to gain exposure to bitcoin.
Grayscale intends to continue its years-long dialogue with the SEC, which takes pride in its transparency and conversations with regulators.
On Friday, three more Grayscale products became SEC reporting companies, bringing the total to six. The designations imply that the products are subject to an additional set of reporting requirements, as well as providing existing fund shareholders with an earlier liquidity opportunity.
“The SEC does not have an easy job here, and we do not take that lightly,” LaValle explained. “Ultimately, it comes down to them being in charge of protecting investors. That is something we understand and appreciate.”