Digital assets officially joined the registered funds arena with the launch of the first Bitcoin (BTC) futures mutual fund in July 2021, and the launch of BTC futures ETFs shortly thereafter in October of the same year. This article is intended to reflect on where we’ve been and what could be next for digital assets in registered funds.
How Cryptocurrency Gained SEC Acceptance
For years, advisers and investors had been hopeful the SEC would approve registered funds investing in cryptocurrency as a primary investment strategy. The SEC was initially resistant, due to its concerns surrounding valuation, liquidity, custody, arbitrage and manipulation. Futures exposure to BTC helped alleviate some of those concerns. Key aspects included:
- BTC futures have traded since 2017;
- BTC futures have experienced increased trading volumes and have been able to consistently produce reportable prices;
- Custody risks have been mitigated due to futures being cash settled; and
- New SEC derivative rules include limiting leverage risk and adopting risk management program.
After the first BTC futures mutual fund was launched, the SEC still wasn’t sold on approving a BTC futures ETF. Then, at the Aspen Security Forum on August 3, 2021, SEC Chair Gary Gensler made a game changing comment regarding ’40 Act ETFs invested in digital assets: “I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded Bitcoin futures.” This one simple comment gave the industry hope — and the race was on to be the first BTC futures ETF to market. ProShares Bitcoin Strategy ETF (BITO) crossed the line first and launched the first BTC futures ETF on October 19, 2021. In the first two days after launch, BITO raised over $1 billion in assets, making it the most successful launch in ETF history. Shortly thereafter, several BTC futures ETFs launched and are currently available.
Along with the launch of BTC futures registered funds, we have seen quite a bit of volatility in the price of BTC — moving from roughly $40,000 per token in late July 2021, peaking at just over $68,000 in early November 2021 shortly after the launch of BITO, then dipping below $20,000 in June 2022. Possibly a coincidence after the BTC price decline, but the first ever short BTC futures mutual fund and ETF launched in June 2022.
What Does the Future Hold?
The possibilities are endless, and there’s a tremendous amount of uncertainty; however, below are two scenarios receiving a lot of oxygen these days.
Spot BTC ETFs
To date, the SEC has rejected every spot BTC ETF filing that’s come across its desk. With that said, they have approved multiple ’33 Act BTC futures ETFs, which is notable because the vast majority of spot BTC ETF proposed filings have been structured as ’33 Act Funds. The SEC his cited market manipulation and investor protection as key reasons for rejecting spot BTC ETFs. With that said, there’s a significant industry push to bring spot BTC ETFs to market. In fact, Grayscale is currently appealing the SEC’s latest rejection and is prepared to appeal all the way to the U.S. Supreme Court.
Ethereum Futures in Registered Funds
The SEC has not approved any Ethereum futures registered funds to date; however, this seems like a logical next step. Ethereum is the second largest cryptocurrency by market cap and Ether futures started trading on the Chicago Mercantile Exchange in February 2021.
No one knows exactly how it’s going to play out, but it’s safe to say that we find ourselves in the very early stages of digital assets’ impact on the registered fund space, with significant developments yet to come.
Contact Mike Meckstroth at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.