Ben Strack

<div id="highlights-block_620e9515e4909" class="highlights">
 <ul>
 <li>SEC Chair Gary Gensler said his agency must consider whether a spot bitcoin ETF is designed to prevent fraudulent and manipulative acts and practices</li>
 <li>Nearly 100 people have so far weighed in on Grayscale Investments’ proposed conversion of its Bitcoin Trust to an ETF in public comments to the SEC</li>
 </ul>
 
</div>



As the Securities and Exchange Commission refuses to budge on signing off on a spot bitcoin ETF, a growing number of industry participants are urging the regulator to reconsider.



The latest battleground: Grayscale Investments’ proposal to convert its bitcoin trust to an ETF (exchange-traded fund). <a href="https://cms.blockworks.co/grayscale-files-to-convert-its-bitcoin-trust-into-an-etf/" target="_blank" rel="noreferrer noopener">The firm filed</a> to morph the $28-billion Grayscale Bitcoin Trust (GBTC) to an ETF in October after the first bitcoin futures ETF <a href="https://cms.blockworks.co/first-bitcoin-futures-etf-nears-1b-on-first-day-of-trading/" target="_blank" rel="noreferrer noopener">began trading</a>.



During the SEC’s 240-day review period, which expires in July, the agency is soliciting feedback from the public.



Andrew Farinelli, a private wealth advisor at Embree Financial, wrote to the SEC that the conversion would reduce costs and improve security for bitcoin investors. Chicago-based Embree, which has 85 institutional clients and 300 families, runs about $1.5 billion.



“Their accounts and investment would often be fully protected under the FDIC, it would be custodied at a trusted institution — [such as] Charles Schwab — and investment itself would be safer under the SEC’s regulation of ETFs,” Farinelli wrote. “Lastly…this allows investment professionals like myself to provide the best guidance to their clients and investors at large.”&nbsp;



SEC Chair Gary Gensler, meanwhile, has given bitcoin ETF hopefuls little reason for optimism. In his latest public comment, Gensler wrote a <a href="https://pbs.twimg.com/media/FLzxM5gUUAsyQOt.jpg" target="_blank" rel="noreferrer noopener">letter</a> Tuesday to US Rep. Tom Emmer, R-Minn., saying the “different holdings” of bitcoin spot and futures products have led to “different regulatory outcomes.” Gensler is “technology-neutral” on the outcome, he wrote.



“When reviewing bitcoin spot ETPs, the commission must apply all the standards of the Exchange Act, which it has followed in connection with its orders considering previous proposals to list bitcoin spot ETPs,” Gensler wrote. “In particular, the commission must consider if the bitcoin spot ETP proposal is designed to prevent fraudulent and manipulative acts and practices.”



The letter followed a November dispatch to Gensler from Emmer and Rep. Darren Soto, D-Fla., saying the agency’s approval of a futures ETF should equate to a greenlight for a spot product.



“We do not understand the SEC’s views around the perceived material difference in risk profiles, since both the futures and spot bitcoin markets are inherently intertwined and bear the same risks regarding fraud and manipulation,” Emmer and Soto wrote.



The stakes are rising. <a href="https://cms.blockworks.co/financial-advisors-bullish-on-crypto/" target="_blank" rel="noreferrer noopener">A survey last month</a> found that the percentage of financial professionals investing client funds in crypto rose from 9% to 15% over the past year. 



Sixty percent cited regulatory concerns as preventing them from making their first or increasing their crypto allocation, while 32% noted the lack of easily accessible investment vehicles, such as ETFs.



The argument of industry powerhouses such as Coinbase is that a spot ETF would lead to an expansion of safe retail investment in bitcoin.



Paul Grewal, chief legal officer at Coinbase, also wrote a letter in support of the conversion in December.&nbsp;



“We believe investors should have access to GBTC in an ETP format because it offers a tried and tested way for retail investors to gain exposure to bitcoin at prices that closely reflect spot Bitcoin trading prices without holding it themselves,” Grewal wrote.



Grewal joined more than <a href="https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190.htm" target="_blank" rel="noreferrer noopener">100 people </a>in writing, with the majority in support of the Grayscale conversion.



“This issue remains a priority for us and we will continue to oversee the SEC in its mission to maintain fair and orderly markets and facilitate capital formation,” Emmer wrote in a Thursday Twitter post.



A spokesperson for Emmer did not immediately return a request for further comment. 



The recent flood of public comments comes after attorneys representing Grayscale Investments <a href="https://cms.blockworks.co/grayscale-attorneys-argue-sec-for-spot-bitcoin-etf-approval/" target="_blank" rel="noreferrer noopener">called the agency’s decision</a> to approve a futures-based fund and not a spot ETF “arbitrary and capricious.”



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Darren Soto

Support for Spot Bitcoin ETF Revs Up as Agency Holds Course

<div id="highlights-block_61896269eb8c6" class="highlights">
 <ul>
 <li>The proposed passively managed ETF is designed to offer investors exposure to the growing intersection of finance, technology, and digital assets</li>
 <li>Grayscale’s brand can help the fund stand out in an increasingly crowded field, ETF.com crypto editor says</li>
 </ul>
 
</div>



As Grayscale Investments awaits approval to convert its flagship bitcoin trust to an ETF, the firm becomes the latest company looking to launch a fund that would offer indirect exposure to bitcoin and other crypto assets through a Grayscale equity ETF. 



The Grayscale Future of Finance ETF (GFOF) would track an index consisting of US and non-U.S. equity securities involved in the advancement of the digital economy, according to a November 5 <a href="https://www.sec.gov/Archives/edgar/data/1540305/000089418921007886/grayscale485a.htm" target="_blank" rel="noreferrer noopener">regulatory filing</a>. 



This includes “companies involved in the enabling of buying, selling, and transacting in digital assets, the development of the infrastructure to create applications utilizing blockchain technology, the supply of infrastructure around the digital asset ecosystem, and the mining of digital assets,” the document notes.&nbsp;



GFOF will not invest in digital assets directly or through the use of derivatives, and will also not invest in initial coin offerings.



The proposed ETF, which does not yet have an expense ratio listed, would be subadvised by Vident Investment Advisory. Its custodian would be US Bank, which <a href="https://cms.blockworks.co/banking-giant-launches-custody-services-for-bitcoin/" target="_blank" rel="noreferrer noopener">announced the roll-out of its crypto custody services</a> for fund managers last month.



“Since our founding in 2013, we have worked to create a suite of secure, familiar investment products that provide investors with access to the digital economy,” a Grayscale spokesperson told Blockworks. “[Friday’s] filing is yet another example of how Grayscale will continue to diversify its product family to meet the increasing demand for future-forward investment opportunities.&#8221;&nbsp;



The filing for what would be Grayscale’s first equity ETF comes as the firm is seeking to convert <a href="https://grayscale.com/products/grayscale-bitcoin-trust/" target="_blank" rel="noreferrer noopener">the Grayscale Bitcoin Trust (GBTC)</a> into an ETF. That fund, which has its shares quoted on OTCQX, has 39.7 billion assets under management.



A handful of other issuers await regulatory clarity for their ETFs that would invest directly in crypto assets. The SEC’s final deadline to rule on VanEck’s bitcoin ETF — meaning the SEC cannot again postpone its decision — is November 14.&nbsp;



US Reps. Tom Emmer (R-Minn.) and Darren Soto (D-Fla.), wrote a letter to SEC Chairman Gary Gensler last week urging the agency to permit physically backed bitcoin ETFs to begin trading.&nbsp;&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">We continue to believe investors want and deserve the opportunity to invest in an ETF directly backed by <a href="https://twitter.com/hashtag/Bitcoin?src=hash&amp;ref_src=twsrc%5Etfw">#Bitcoin</a>. It&#39;s heartening to see bipartisan agreement on this point from <a href="https://twitter.com/BlockCaucus?ref_src=twsrc%5Etfw">@blockcaucus</a> co-chairs <a href="https://twitter.com/RepTomEmmer?ref_src=twsrc%5Etfw">@RepTomEmmer</a> and <a href="https://twitter.com/RepDarrenSoto?ref_src=twsrc%5Etfw">@RepDarrenSoto</a>. <a href="https://t.co/UgEkmhPSPw">https://t.co/UgEkmhPSPw</a>&mdash; Grayscale (@Grayscale) <a href="https://twitter.com/Grayscale/status/1456012823214051333?ref_src=twsrc%5Etfw">November 3, 2021</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



In the meantime, the number of ETFs offering indirect exposure to bitcoin and other crypto assets continues to grow.



<h3 class="wp-block-heading">An increasingly crowded field</h3>



ProShares launched the first bitcoin futures ETF on October 19, and Valkyrie Investments launched a similar fund three days later. The first-to-market product has grown to $1.3 billion assets under management, while the assets in Valkyrie’s offering total about $52 million.



Other ETFs already on the market invest in the crypto industry more broadly.



Sumit Roy, crypto editor and analyst at <a href="https://www.etf.com" target="_blank" rel="noreferrer noopener">ETF.com</a>, said Grayscale’s name recognition, distribution and social media presence will likely help its proposed ETF attract assets. However, he noted, many of Grayscale&#8217;s products, most notably GBTC, benefited from being the first mover.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“This latest ETF is somewhat of a late mover and is facing competition from a handful of ETFs already on the market that hold stocks of crypto-related companies,” he said.</blockquote>



Amplify Investments’ actively managed Transformational Data Sharing ETF (BLOK), which has taken the largest share of flows among US blockchain ETFs, stands at $1.6 billion assets under management, with more than half of those assets entering the fund in 2021, Roy noted.



On the passively managed side, the Siren Nasdaq NexGen Economy ETF (BLCN), which became available in 2018, holds more than $300 million. Bitwise Asset Management’s Crypto Industry Innovators ETF (BITQ), which launched in May, now has more than $110 million in assets, while Global X’s Blockchain ETF (BKCH), which hit the market in July, has about $87 million.&nbsp;



Most recently, Valkyrie <a href="https://cms.blockworks.co/two-new-valkyrie-funds-planned-for-bitcoin-exposure/" target="_blank" rel="noreferrer noopener">applied with the SEC</a> to launch an ETF that would invest in bitcoin miners and another focused on companies involved in the space, such as bitcoin custodians, exchanges or traders, as well as those that invest in or have a portion of their assets accounted for by direct bitcoin holdings.



Roy said he believes Grayscale’s proposed ETF could ultimately differentiate itself within the crowded field.



“Grayscale is just such a strong brand within the crypto community and even though there is competition from BLOK and others, it is still pretty early for an ETF category that is likely to grow many-fold from here in the years to come,” he explained. “Ultimately, the performance of these funds — which are likely to vary significantly from ETF to ETF — may drive flows and play a part in determining which ends up being the biggest.”

Darren Soto

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