An SEC staff statement on Bitcoin and mutual funds has some analysts thinking the agency is leaning against approving a Bitcoin exchange-traded fund in the near term, potentially dashing the industry’s hope that this is the year an ETF is approved , destroyed.
At least six Bitcoin ETF applications have been filed with the Securities and Exchange Commission, including from heavyweights like Fidelity. They await a determination this year. Earlier this year, Canada approved its first Bitcoin ETFs, and they have become popular.
The SEC statement, released late Tuesday, was mostly focused on mutual funds and whether they should offer investors exposure to Bitcoin futures contracts. It says Bitcoin futures can add risks to mutual funds, raising particular concerns about liquidity in mutual funds, which need to have enough cash to pay out returns to investors who sell their shares.
“Among open-ended funds, [SEC Division of Investment Management] staff believes at this time that investment in the Bitcoin futures market should only be pursued by mutual funds with appropriate strategies that support this type of investment and full disclosure of material risks,” the statement said.
It’s still relatively rare for mutual funds to hold Bitcoin futures, which are offered by CME Group (ticker: CME). But some big companies have started to consider them. Both BlackRock ( BLK ) and Morgan Stanley ( MS ) said in securities filings that some mutual funds may consider investing in Bitcoin futures. BlackRock disclosed in March that the BlackRock Global Allocation Fund held $6.5 million worth of Bitcoin futures at the end of January, which made up just 0.0014% of its portfolio. BlackRock had no comment on the SEC’s statement.
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Morgan Stanley also allows some funds to buy Bitcoin futures. The company did not immediately respond to a request for comment on the statement.
While much of the SEC statement focused on mutual funds, one section of the staff statement referred to ETFs, and some saw that as a sign that the regulator is wary of a Bitcoin ETF.
The division said that the staff will “consider whether, in light of the experience of mutual funds investing in the Bitcoin futures market, the Bitcoin futures market can accommodate ETFs, which, unlike mutual funds, cannot prevent additional investor assets in the ETF. if the ETF becomes too large or dominant in the market, or if the liquidity in the market starts to decline.”
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This alone does not mean that the staff is against a Bitcoin ETF. And the staff wouldn’t make the decision whether an ETF could trade anyway — that would be up to the commissioners themselves. Still, the SEC staff is an important part of the process.
People in the industry who “read the tea leaves” were convinced “that 2021 could be the year for a Bitcoin ETF to be approved and then finally start trading,” Todd Rosenbluth, director of mutual and exchange-traded fund research at CFRA Research, said in an interview. Gary Gensler, the new chairman of the SEC, learned about cryptocurrencies at MIT, and was seen by some as likely to be friendly to the industry.
But Tuesday’s statement, Rosenbluth said, makes it appear that “the SEC remains uncomfortable with the risks associated with Bitcoin in a fund, and is unlikely to approve a new product whose sole purpose is to provide exposure to provide Bitcoin.”
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“It gives me more concern that there will be a delay of a Bitcoin ETF being approved and we won’t see one until 2022 at the earliest,” he added.
Michael Venuto, chief investment officer of Toroso Investments, also took the statement as such. Toroso has created an exchange-traded fund called Amplify Transformational Data Sharing (BLOK) that tracks companies involved in cryptocurrencies and blockchain technology. Venuto wrote in an email to Barron’s that he did not expect an ETF to be approved anytime soon. “The statement seems to confirm my view that a Bitcoin ETF is still a long way off in the US,” he wrote.
The SEC declined to comment on whether its statement indicates it intends to delay the process of approving an ETF.
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