Cryptocurrency manager Hashdex has moved away from the approach that BlackRock and other asset managers have taken in asking the SEC for permission to launch a spot Bitcoin ETF. What's different about its filing?
The Securities and Exchange Commission (SEC) has rejected at least 30 applications to create a Bitcoin spot exchange-traded fund in the United States since 2013.
The securities regulator has since maintained that a Bitcoin spot ETF may pose several risks to investors, primarily due to the lack of regulation in the crypto market. It suggests that the lack of regulation may lead to manipulation and fraud.
Due to the SEC's strict stance, the crypto community has been waiting for a decade for the arrival of such an investment vehicle for the largest cryptocurrency on the market.
However, while the possibility of a Bitcoin spot ETF approval remained quite distant, analysts have once again become optimistic and foresee a possible change at the SEC this year. The main reason for all this is the filing made by BlackRock, the largest fund manager in the world, which manages more than $10 trillion and has an impressive approval record with the regulator.
BlackRock filed a Bitcoin spot ETF application proposing a “co-surveillance” arrangement that would increase the transparency of the Bitcoin market and mitigate the risk of manipulation. Its proposal has been emulated by several of the companies also looking to launch a Bitcoin spot investment fund in the United States.
However, Hashdex, the company that manages more than $400 million of its clients' assets and has joined the applicants for a spot ETF, has moved away from the model proposed by BlackRock to manage risks in the Bitcoin market. Instead, Hashdex proposes holding spot Bitcoin through a Bitcoin futures ETF regulated.
Bloomberg ETF analyst James Seyffart noted that Hashdex's strategy of trading Bitcoin futures for equivalent spot exposure was unique and perhaps difficult for the SEC to reject.
EFP transactions for the purchase and sale of Bitcoin
According to Hashdex, a Bitcoin spot ETF is an investment fund that tracks the price of the cryptocurrency on the market directly. For regulators, this poses a risk because investors would be exposed to an unregulated market.
Hashdex's proposal to include spot Bitcoin in its Bitcoin futures ETF therefore represents a different approach that offers greater assurances to regulators to mitigate the possibilities of manipulation and fraud.
Through its proposed ETF, Hashdex seeks to Trading Bitcoins on the Chicago Mercantile Exchange (CME), which is regulated by the Commodity Futures Trading Commission (CFTC) and the SEC.
According to the company, The buying and selling of bitcoins would occur through EFP (Exchange for Physical) transactions on CME. This type of transaction allows one of the parties involved to buy physical assets and sell futures contracts, while the other party sells the physical assets and buys the futures contracts.
On this, The ETF Store president Nate Geraci told Blockworks that the strategy presented by Hashdex was smart and put the SEC in a difficult position to deny its approval, since the regulator “has already blessed the bitcoin futures market on CME.”
On the other hand, Morningstar hedge fund executive Bryan Armour told the same outlet that Hashdex’s filing is further proof of the precedent the SEC has set in the crypto market. He said using an EFP transaction to avoid the direct purchase of bitcoin “feels a bit like a procedural technicality,” noting that these “technicalities” are exactly what the SEC has rewarded so far in relation to the crypto market.
The importance of approving a Bitcoin spot ETF
According to Hashdex, the approval of a Bitcoin spot ETF would represent a milestone for the cryptocurrency industry.
The company sees the creation of such an investment vehicle as necessary to “offer clients exposure to bitcoin through a familiar and trusted vehicle that is liquid and affordable.” In addition to this, Hashdex highlighted that the approval of a Bitcoin spot ETF on US soil “would symbolize regulatory support, which indicates the maturity of the market and the readiness for institutional investors to enter with confidence.”
Hashdex, which became the first Latin American company to launch a cryptocurrency investment fund, said that the term “Bitcoin ETF” has become a trending topic on social media and that, despite the uncertainty surrounding the approval of this investment vehicle, investors remain quite optimistic.
The SEC has until the first quarter of 2024 to delay a decision on whether to approve or reject the most recently received batch of Bitcoin spot ETF applications. It is also possible that the securities regulator will approve several of the applications received or that it will only admit one of them. Either way, Hashdex stressed that the SEC can no longer ignore investor demand.
Continue reading: Ark Invest and 21Shares file for new Bitcoin and Ethereum futures ETFs with the SEC
