How the First North American Bitcoin ETF Made it Across the Finish Line

When reviewing Purpose Investment’s proposal for a bitcoin ETF, regulators at the Ontario Securities Commission had a question: ‘Is this going to be an asset class that’s going to be around for a while?’  

This wasn’t the first time that regulators at the OSC in Canada had seen a proposal for a bitcoin ETF come across their desk. In 2017, during the bitcoin bull market at the time, there were a number of bitcoin ETF proposals sent to regulators that were universally rejected.

Why?

The OSC wasn’t convinced then there were investment-grade custody and infrastructure services available to support an ETF. And, they were also not so sure that bitcoin was something with a long time horizon — it might not be around in a few years, they thought.

“I think that they were right to have all those concerns in 2017. The space is very different three years later than it was back then,” Brian Mosoff, CEO of Ether Capital told Blockworks in an interview. 

Ether Capital acted as a special consultant to Purpose Investments to prepare its bitcoin ETF, now trading under the ticker symbol BTCC in Toronto, for launch. 

BTCC hit $564 million in AUM in its first two days of trading and charges a one percent management fee. Bloomberg Intelligence ETFs analyst Eric Balchunas tweeted that BTCC could hit $1 billion by the end of this week.

Mosoff explained that a key milestone in getting the regulator to become comfortable with the idea of a bitcoin ETF was the success of closed-end bitcoin funds like the Grayscale Bitcoin Trust (GBTC) or 3iQ’s bitcoin fund. 

“These were important products to bring to the market and they really paved the way for the regulator to get comfortable and say, ‘there are institutional grade ways we can do custody, right?’” Mosoff said. “The closed end funds were in the market long enough and proved the custodians weren’t going to get hacked.”

The next challenge: liquidity

Closed-end funds have a significant premium over the Net Asset Value, which leads to a market of investors running arbitrage plays on the premium.  That dynamic won’t work for an ETF.

“Now the question was, can you build a workflow where you could be doing daily liquidity? And the answer is yes. And that’s different than in 2017,” Mosoff said. “In that three years, as regulators have given clarification, you’re seeing better and more robust players coming online who are holding the appropriate licenses and now you can source that liquidity from a number of different players. Now we can do daily liquidity. The market is deep enough that we can do this.”

Given the regulatory green light and continued investor interest, Mosoff thinks there will be more institutions filing for ETFs. Only days after Purpose Investment’s BTCC began trading in Toronto, another ETF from Evolve listed as EBIT on the TSX.

“Canada’s past track record of legalization, as they did with cannabis, exemplifies their willingness to move quickly around new opportunities,” said Nisa Amoils, a partner at venture capital firm A100x.

When will there be an American Bitcoin ETF?

While most Toronto-listed stocks are available to American investors, the lingering question is when will the SEC approve a bitcoin ETF to be listed stateside. After all, the SEC has rejected 9 bitcoin ETFs — most of which occurred concurrently in August 2018 — which has been discouraging to industry participants.

Jackson Mueller, Director of Policy and Government Relations at Securrency, a Washington, DC based financial infrastructure company thinks the first SEC approval is going to come “soon” and points to many of the same things Mosoff highlighted as reasons why the regulator would be more comfortable.

“Within the last two years, there has been a sea change in regulatory perceptions, engagements, and interest in developing guidance and regulatory frameworks in support of Bitcoin ETFs,” Mueller said. “The OSC’s recent spate of approvals… may help to accelerate that process by providing the SEC further insight into these products, potentially addressing, or at least mitigating, prior SEC concerns regarding fraudulent and manipulative acts and practices – the central concern at the heart of the SEC’s prior disapprovals.”

“It’s no longer a question of ‘if’ but ‘when’,” he said.