Bitcoin ETF: Wall Street’s Path to Crypto | Cointelegraph Documentary

What's the next thing? And for a little while it was diamonds and there was a little bit of buzz around diamonds. And then the crypto came in and now the entire industry is like, oh my gosh, this is where the world is going and we have to get in it now and we have to be a part of it.

Let me just pivot a little bit and ask you about Bitcoin etf.

ETF sales are hitting record highs again.

The SEC has once again denied several proposals for a Bitcoin ETF.

Every time we hear about Bitcoin ETFs in the news, we see a reaction in the market. Recently, an April Fool's Day joke about the SEC approving a Bitcoin ETF was cited as a possible reason for the huge price spike. So why are ETFs so important to the crypto market? While Bitcoin was originally designed to be an alternative to the traditional financial markets, today Bitcoin actually needs those financial giants. And in turn, Wall street is eyeing crypto as a potential golden goose and want to get in on the action. And this is how Bitcoin ETFs might help.

Institutions are out there to make money too. And if they see a way to make money, they're going to go look for, look for a way to participate in those markets.

This is Hester Pierce, AKA cryptomom, a commissioner at the SEC and an outspoken advocate for bitcoin. She agreed to speak with us about her personal attitude toward a Bitcoin etf, but not necessarily the views of the Commission as a whole.

I think you've seen real interest from institutional investors at looking at this asset class and saying, hey, this is an asset class that allows us to diversify our portfolios more. And so they want to have a way to invest in this asset class.

One such company trying to build that path for institutional investors is Vaneck, a mutual fund with over a 60 year history and $50 billion in assets under management. Then ECK has been filing Bitcoin ETF applications to the sec, but so far unsuccessfully.

Bitcoin is widely available today to investors, but mostly on unregulated platforms. So, platforms, these are trading platforms that people call crypto exchanges. And so ETFs bring Bitcoin from this gray area to a regulated area so that investors who are not comfortable investing on trading platforms can access Bitcoin with more safeties and securities, things that investors are used to in the equity and commodity markets. I think a lot of crypto exchanges are in some ways conflicted they are custodians, traders, index providers, funds, and perform a number of activities that are not performed by the same entity in financial services. So an ETF by design solves all of those problems that sell single centralized exchanges face.

So here's the problem. Large institutions can't buy Bitcoin and Crypto the same way that retail investors do. They need a regulatory approved mechanism. But before we get there, let's explain what an ETF is and how it actually works. ETFs are exchange traded funds that are bought and sold like shares on a stock exchange. But instead of investing in a business, the fund can invest in a variety of things, such as an index of different companies, stocks, bonds or commodities like gold or oil, or possibly soon Bitcoin. Essentially, the value of an ETF goes up or down, depending on the value of the underlying asset. We met up with Richard Keery, who's been working in the ETF industry for more than a decade, to find out more about what ETFs actually are.

Well, ETF is just a vehicle, right? It's just an access field to access the market. So if the market goes up, you're making money. If the market goes down, you're not making money. The sponsor of the fund and the owner of the trust is the one who holds all the Bitcoin. So in other words, when an investor comes in and says, okay, here's $10,000, then the advisor goes out and buys $10,000 worth of Bitcoin or put it into his server, which is going to be in a vault and it's going to be secured, and then the investor is going to be issued shares, and then he can trade all day long in and out of the market with those shares. He doesn't have to go back to a Bitcoin market anymore. He can just trade his shares up and down however he wants.

So with Bitcoin as the underlying asset, the sponsor of the ETF will buy Bitcoin from authorized regulated bodies called market makers and hold the Bitcoins in a secure place. When more investment comes in, the ETF sponsor will purchase and hold more Bitcoin. And when investors want to pull their money out of the fund, the sponsor will liquidate the assets by selling them back to those market makers. In order to facilitate easy entrance and exits, the fund will rely on Bitcoin futures contracts to offset their risk.

A fund is basically a pool investment vehicle that multiple investments investors can invest in and it trades real time on an exchange like nasdaq, CBOE or nyse. So there's real time pricing to it. There are larger companies called authorized participants who buy the underlying Bitcoin. And the ETF issuer swaps ETF shares to the underlying shares. You know, that works the same way with the S&P 500 and other other equities and bonds. The cool thing about it is that authorized participants are encouraged to add liquidity and buy underlying Bitcoin at every time, thereby increasing the overall liquidity of the etf. So there's always a list of market makers who are ready to buy and sell shares and exchange it for ETF shares and making this process of buying and selling more seamless than it is to go to an exchange directly. So an etf, actually the great thing about, from a liquidity perspective, the great thing about an ETF is it reaches out to all of the liquidity pools that are available, plus adds an extra level by virtue of having an ETF in the market. By owning a share of the Bitcoin ETF, you own the underlying Bitcoin in a one to one correspondence.

ETFs are a hot market. They account for about a quarter of the daily trading volume in U.S. stock markets, sometimes even reaching up to 40%. Assets invested in ETFs listed globally have reached $5.3 trillion, with an average growth rate of about 20% per year. BlackRock, a leading asset manager, predicts the global ETF market could double by 2024.

An institutional investor may invest somewhere between 0.3 to 0.7%, less than 1%, certainly to something like a Bitcoin ETF. So that's one school of thought. The second is there are some investors who are interested in early venture type of investing. So they think about Bitcoin as a technology. So they use their venture allocation bucket to put a little bit of money just 0.2 to 0.5% of their portfolio value.

Half a percent doesn't sound like very much. But just take the 50 largest institutional investors. They hold almost $42 trillion in assets under management. And so if just 0.5% of their assets are invested in Bitcoin ETFs, it means a whopping $200 billion added to the market, which is even more than the whole crypto market is today. So even a fraction of that money can be a significant game changer. But before billions of institutional dollars will flood the crypto market, the SEC needs to give their approval for a Bitcoin etf.

The question of what our official position is on cryptocurrency is a Broad one. And there's no, there's no single answer to that. When someone wants to build an ETF on top of a crypto asset, we should sort of approach it in the same way that we would approach someone building an ETF on top of any other asset. Unfortunately, we haven't always taken the right approach in approving ETFs, even for things like gold. People who haven't dealt with a regulator very often, especially a regulator like the sec, don't realize how long things can actually take.

And this is true as the process for getting a Bitcoin ETF on the market started all the way back in 2013 when the Winklevoss twins first made their proposal. And nearly six years later, it's still hard to know how much longer the road toward approval might be.

The SEC has been afraid to push these products onto the market, lest things happen to consumers that in the end would redound to the regulator and leave them with egg on their face.

This is David Yermak, professor of Finance at NYU's Stern School of Business, who has been teaching courses on Bitcoin and cryptocurrencies. We sat down with him to get an academic's view on the possibility of a Bitcoin etf.

There have been a number of concerns about the underlying assets that typically an ETF holds liquid securities, stocks and bonds, maybe things like precious metals and commodities, but crypto assets. It's not clear to the regulator what these are, what assures the security of them, even what the market price of the underlying asset may be on a given day. Because the trading of crypto assets is in fairly illiquid markets that often show very different prices even at the same time.

Exchange traded funds have been around for a long time, and we're just now getting around to proposing a rule to build a framework within which exchange traded funds can live. Until now, we've been doing it by exemptive order, which is a very slow, cumbersome process, which makes it very difficult for new entrants to come in and compete in this space. And which means that the standards that apply to each, to each participant are not necessarily uniform. And so that's a great lesson for people to know. Wow, this exchange traded funds, which are so prevalent in our markets now, don't even yet have their own regulatory framework.

So what's stopping the SEC from approving Bitcoin ETFs?

So from a SEC perspective on financial products on the marketplace, they need to see enough liquidity that everything gets bought, can easily be sold, that it's a fluid market. The other thing is price manipulation. That's the biggest thing SEC is afraid of. Right. Their job is to protect investors and to keep markets, you know, fair and reliable and trustworthy. So in order to do that, they have surveillance processes in place today across a variety of asset classes. Wherever that trading market is, they have to have an information sharing agreement with the exchange where the product is listed. And so they can track a trade, an individual trade, back to the person who entered the original order. So until that's in place, it's unlikely that they're going to approve it because they're not going to be comfortable about price manipulation.

So what is the future of Bitcoin ETFs and will we see them approved? Everyone we talked to seemed to believe that it was simply a matter of time, as investors at every level are still enthusiastic about this new asset class.

There's so much pressure for these products on the demand side that one way or another, the regulator is going to see its way into finding a loophole or regulation that allows them to come to the market. I think there's a great risk to the SEC that it becomes irrelevant in the long run. If people start raising money through ICOs and crypto ETFs and so forth, and they simply refuse to regulate them, people will find ways to own them, and the market may go offshore, it may go into the commodities area. I think in the long run, the sec, if it wants to keep its mandate to regulate investments, will have to find a way to allow these things into the market. That's the reality that there's a great demand for this and that one way or another, regulator's eventually going to validate that demand.

I think if we don't make routes available to folks, they will find another way to get access to the market.

And this is something that quite a few people are concerned about. The SEC has opened up the discussion so that anyone can comment on it. And some are wondering why the SEC isn't approving it, since it at least provides more safety than investors buying Bitcoin on unregulated exchanges.

The most common response I get is, when is a Bitcoin ETF going to be approved? And, you know, again, I'm not going to be able to predict. I do encourage people to come on in. Talk to me about the projects you're working on. Talk to me about the ideas that you have. Talk to me about the problems that you're running into.

And it should be noted that not everyone wants a Bitcoin ETF approved. Many comments question the realness of Bitcoin and fear that the whole thing is just a scam. But in a somewhat chicken or the egg scenario, a bitcoin ETF would actually make Bitcoin more real, at least in the sense of a store of value.

And actually, I think it's very important to have proper financial tools for asset classes. And Bitcoin right now is a nascent asset class. And once an ETF exists, it can be thought of more of a store of value instrument than right now.

A bitcoin ETF would be a huge deal for the crypto community. It will not only bring new investors with deep pockets, but it will also legitimize Bitcoin as a new asset class. So whether it's tomorrow, next week, next month, next year, et cetera, one thing is clear.

It's definitely when it's not if it's definitely when.

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