Traders Urge Caution on Potential Bitcoin ETFs

There have been significant steps taken in recent months to breathe confidence into the digital space—with Six Swiss Exchange set to launch a cryptocurrency platform designed to provide trading, settlement and custodial services, and VanEck teaming up with SolidX to file its third bid to list a physically backed bitcoin exchange-traded fund (ETF).

These latest movements, however, have still failed to alleviate industry concerns relating to crypto ETFs, with some of the key issues involving security, anti-money laundering (AML) and know your own customer protocols.

“One thing I’ll tell you that has to get fixed before this is going to be a true, viable means of currency, and thus [suitable for] building financial products around it, is the safety,” says Steve Sachs, managing director and head of global markets at Goldman Sachs Asset Management. “We can’t keep waking up in the morning and having news headlines around another $150 million or $400 million hacking and theft of cryptocurrency. That problem has to get solved.”

The US Securities and Exchange Commission (SEC) is expected to take eight months to conduct a thorough analysis of VanEck and SolidX’s application to list a bitcoin ETF on Cboe Global Markets’ exchange, which focuses on areas such as liquidity, price evaluation, and customer protection.

The concept of bitcoin ETFs is intended to provide institutional investors with exposure to cryptocurrency prices at a fraction of the risk. VanEck has said it will offer insurance services for its bitcoin ETF against incidents such as theft, hacking, loss or destruction, but ETF experts have called this provision into question.

Exchange-traded products in bitcoin have been around for several years in Europe. In April 2015, Nasdaq Stockholm listed the Bitcoin Tracker One, the very first bitcoin-based exchange-traded note (ETN), and earlier this year, France announced steps to create a legal framework for digital currencies. Despite Cboe and the Chicago Mercantile Exchange launching futures on bitcoin in late 2017, the US has yet to approve an equivalent on its domestic exchanges.

Part of this is due to the bifurcation in US regulatory structure. The futures contracts are overseen by its sister regulator, the Commodity Futures Trading Commission, which also claims jurisdiction over bitcoin after it determined the cryptocurrency was a commodity. The SEC, however, has broad jurisdiction over listed products such as ETFs, and has continually demonstrated a more cautious approach to certifying these applications, despite a senior SEC official saying that bitcoin and ether on their own did not qualify as securities earlier this year.

“The regulator in the US is very concerned about this [crypto products], as are regulators in many countries,” says Deborah Fuhr, managing partner and co-founder at ETGFI, an independent research and consultancy firm. “There are concerns about pricing of the cryptos, there’s concern about their use for money laundering and there’s been an increasing number of requests to create crypto products but so far the regulators have not allowed this to happen.”

Now as regulators remain tight-lipped on the prospect of a new wave of digital products, many major institutions remain skeptical of their value. In January, Nordea banned employees from owning or trading cryptocurrencies and has urged regulators to take more immediate action, while other heavyweight firms such as Vanguard caution investors on digital investments. Chief executives from major buy and sell sides have also labeled bitcoin as a “fraud” in recent years, although markets were sent sharply up last week on reports that BlackRock had established a working group to explore how it can engage with cryptocurrencies, perhaps signaling a softening of attitudes.

Still, many remain unconvinced about the material benefits of bitcoin, either as a tradable product or a store of value.

“It’s wise to invest in assets that have an intrinsic value that you can understand and that actually will offer a diversifier of idiosyncratic risk, and in the long term provide real positive net returns—[for example] they’ll actually be increasing your wealth over the long term, because that’s typically what people invest in,” says Mark Fitzgerald, head of ETF product management, Europe at Vanguard. “I’m not sure you can say that of the current batch of cryptocurrencies, because it’s not apparent that they have any intrinsic wealth or ability to provide a real net return over the long term.”