Will Flourishing Canadian Crypto ETFs Guide US SEC Decision?

The instant popularity and record inflows of the Canadian-based Purpose Bitcoin exchange-traded fund have many wondering how and when the US Securities and Exchange Commission will approach the roster of US-based ETFs lined up for approval.

Demand for a bitcoin exchange-traded product in the US is getting stronger by the day. Fidelity, Goldman Sachs, SkyBridge Capital, NYDIG and VanEck are just some of the firms that filed for a crypto ETF this year. Just this week, digital asset manager Grayscale Investments said it plans to convert the Grayscale Bitcoin Trust (GBTC) into an ETF when possible. 

Meanwhile in Canada, Evolve Funds Group Inc., followed Purpose Investments and launched similar crypto ETFs in February 2021. The two new products helped Canadian ETFs see inflows of $5.2 billion in February, the second-highest month of inflows on record. 

While it remains to be seen whether or not the SEC will approve ETFs, if Canada’s success is any indication of what the US can expect when it comes to popularity and inflows, April or May—when the SEC is expected to make a decision—could be exciting months in the crypto space.

ETFs vs. crypto exchange-traded products 

ETFs are different from other crypto exchange-traded products, like GBTC, in that they tend to have high enough liquidity so that it’s unlikely they would ever trade at a premium or discount to net asset value. (GBTC often trades at a discount.) 

ETFs are also less risky than closed-end mutual funds, like GBTC or the Bitwise 10 Crypto Index, making them more attractive to mutual fund managers and pension funds. 

“An ETF is the superior investment product structure because it provides greater liquidity, better pricing and more tax efficiency,” said Ric Edelman, founder of the RIA Digital Assets Council. “It also provides greater security and confidence to investors who may not feel comfortable buying digital assets directly on an exchange.” 

The ETF boom

Both the SEC and the Ontario Securities Commission began receiving bitcoin ETF applications back in 2017 when the largest digital currency was experiencing its last major rally. At the time, regulators were unsure if digital assets would last long enough to justify an ETF. 

In 2021, bitcoin is up about 96% year-to-date, but today’s rally is different because this time, institutional investors are taking digital assets seriously. 

“Institutionalization of the asset class is a game-changer,” said Edelman. “Unlike during the 2017 rally, bitcoin’s price is now being supported by institutions.”

In addition to the many ETF applications, some of the biggest names in finance are getting involved in the asset class. Morgan Stanley will soon offer crypto exposure to wealthy clients, Goldman Sachs filed a cryptocurrency-tied exchange-traded product and BNY Mellon is looking to offer bitcoin custody this year.  

“We raised four times the amount of money into our family of products in 2020 than we did over the preceding six years, cumulatively, and about 80 or so percent of that inflow was from institutional investors,” said Michael Sonnenshein, CEO of Grayscale. “We definitely saw a lot of that momentum not only carry over, but actually increase during the first quarter of 2021.”

A new regulatory climate 

Many are hoping that the new presidential administration will take a more favorable stance when it comes to digital assets. SEC chairman Gary Gensler, who took on the role in March, is thought to be more open-minded about digital assets than his predecessor, according to Edelman.

“Jay Clayton was opposed to digital assets, but Garry Gensler understands them, he taught blockchain and digital currencies at MIT,” he said, adding that it doesn’t hurt that CEO of cryptocurrency derivatives platform FTX Sam Bankman-Fried made the second-largest donation to Joe Biden’s presidential campaign, according to a report from the Wall Street Journal last year. 

However, the nature of digital asset pricing and trading has proven to be a significant regulatory hurdle when trying to get an ETF through the SEC. Bitcoin and other cryptocurrencies are global assets with 24/7 trading cycles, not to mention different exchanges offer different prices. 

“Buying bitcoin is like buying toothpaste—prices vary—and where you buy it determines the price,” said Edelman. “That attribute of digital assets bothers the SEC, they want to maintain consumer confidence, so pricing poses a challenge.” 

The solution, Edelman said, is for the industry to adopt a set of pricing standards that would reassure the SEC. 

“My belief is that these companies that have submitted ETF applications to the SEC are demonstrating pricing metrics in the applications in an effort to provide the SEC with that confidence,” Edelman said. “And that is going to be essential.”