As it was announced March 18 that the first North American bitcoin exchange-traded fund (ETF) has passed the billion-dollar mark in assets under management just one month after launch, the U.S. finds itself in “a little bit of a hole” regarding bitcoin ETFs, says Securities and Exchange Commissioner Hester Peirce.
In mid-February, the Purpose Bitcoin ETF was approved in Canada and launched by Purpose Investments on the Toronto Stock Exchange. Since the launch of the fund, bitcoin surged to record highs of more than $61,000 and closed at over $54,200 on Monday.
“When we launched Purpose Bitcoin ETF, we knew we were filling a void in the market. Hitting this milestone so quickly proves that investors are seeking convenient, safe access to cryptocurrencies and shows their confidence in our ETF as the premier vehicle for that exposure,” said Som Seif, founder and CEO of Purpose, in a March 18 statement.
Canada’s securities regulators have approved three bitcoin ETFs within the past 90 days, and the second one, the Evolve Bitcoin ETF approved one day after the Purpose Bitcoin ETF, already has more than $86 million AUM.
Meanwhile in the U.S., although at least 10 sponsors have reportedly sought SEC approval to launch a bitcoin ETF, none have been approved.
On March 19, Anthony Scaramucci’s SkyBridge Capital became the latest investment firm to file with the SEC for the right to launch a bitcoin ETF, joining a list of others that have applied so far this year including Morgan Stanley, VanEck, Valkyrie Digital Assets and WisdomTree.
While firms have been trying to get a bitcoin ETF approved in the U.S. since 2019, could this be the year it finally happens? Hester Peirce has had a lot to say recently about the possibilities.
Peirce, who was appointed as an SEC Commissioner in early January of 2018 by President Trump, has earned the nickname “crypto mom” for her support of digital assets. She has spoken out twice in recent days about how SEC should regulate digital assets, and the issues created by inaction on the crypto-ETF front.
“I think we’ve dug ourselves into a little bit of a hole here because we’ve waited a long time now to approve this kind of product,” Peirce said during a virtual appearance on Blockchain Policy Matters, a webcast hosted by Bitcoin Association Founding President Jimmy Nguyen.
“I’m not advocating any kind of portfolio composition to people, but I’ve heard from a lot of people, institutional and retail, that they want access to crypto through our regulated markets,” Peirce said on the webcast. “So it seems to me that it makes sense for us to consider how to do that. Other countries have done it already. There are products that allow people to access crypto through our securities markets but they’re costlier than probably an exchange-traded product would be.”
In addition, while virtually addressing the British Blockchain Association’s Conference on March 15, Peirce said that while regulators need to understand and scrutinize new asset classes and technologies, excessive conservatism can impede competition, distort the market, and harm investors.
“The SEC, for example, has hesitated to greenlight investment products that incorporate bitcoin—let alone other cryptocurrencies,” Peirce said. “Although well-intentioned, our wariness with regard to crypto deprives investors of access to products and services that they want. Moreover, caution-motivated delay makes it more difficult for us to change course should we decide to do that. If we have said ‘no’ to one product sponsor, how can we say ‘yes’ to another seeking to offer a similar product? Meanwhile, the market engineers around our denials by creating substitutes that do not require SEC approval.”
Peirce said she is frequently asked about bitcoin ETFs (which she refers to as the “bitcoin exchange-traded product”), a much-anticipated product with strong investor support as evidenced by the quick starts north of the border.
Why the hold-up in the states when potential sponsors have been clamoring for crypto ETFs for years?
“As noted in my statements following the disapproval of these requests, rather than applying the fairly straightforward standard that we have typically applied in approving other ETP filings—including for precious metals like palladium and platinum—we have insisted on increasingly sophisticated analyses of the relationship between the underlying spot market and the futures market to determine the susceptibility of these markets to fraud and manipulation,” Peirce said.
“Not only is it unclear whether prior non-crypto ETP filings could have passed muster under this more rigorous approach, the ever-shifting goalposts are unfair to innovators who spend ever-increasing amounts of money on attorneys and quantitative experts only to find that they have failed to hit a target that has moved once again.”
Official bitcoin-bashing not helpful
Peirce also lamented the fact that it’s become common to hear U.S. government officials bashing cryptocurrency for being inefficient and frequently used for criminal activity.
“Perhaps, government officials should pause to consider the flip-side of crypto—its value in protecting people from illicit activity,” Peirce told the British Blockchain Association audience.
In late February, Treasury Secretary Janet Yellen said she fears it is used mostly for illicit finance, noted its volatility, and piled on further: “It’s an extremely inefficient way of conducting transactions, and the amount of energy that’s consumed in processing those transactions is staggering.”
Peirce counters that the disproportionate focus on illicit uses and the underestimation of the protective uses of crypto is one example of how evidence-based rulemaking is not yet the norm in crypto-regulation. “We can do better, and I hope that this year will mark a turning point for the United States,” she said.
Gensler could help
Shifting back to her comments on the Blockchain Policy Matters webcast, Peirce said that while she is concerned about this space, “I hope it’s something that we’ll confront sooner rather than later.”
Help could be on the way in the form of President Biden’s SEC Chairman nominee Gary Gensler, who is expected to be confirmed by the Senate as soon as later this week.
“I’m hopeful that he will bring the knowledge that he has from his time at MIT to the commission and help us think about these issues in a more sophisticated way, in a way that’s more suited to providing regulatory clarity,” Peirce said. “I have been calling for more regulatory clarity so I think that this is a really good opportunity for someone like Gary who has a lot of experience in setting up regulatory structures.”
Gensler, who recently taught a course on blockchain and cryptocurrency at MIT, is widely viewed as being much more crypto-friendly than his predecessor Jay Clayton, who stepped down as the chair of the SEC in Dec. 2020.
Clayton’s exit is seen by many as opening the door to the SEC finally approving bitcoin ETF products. As a March 22 article on Financial Magnates notes, it was unlikely a bitcoin ETF would be approved while Clayton was in office.
Bitcoin ETFs and 401ks
To date, exchange-traded funds have not made major inroads into the 401k market. This is partly because some of the advantages they offer investors—like intraday trading—are irrelevant in an inherently long-term 401k setting where the last thing sponsors would want is employees managing their holdings during work hours.
With the exception of self-directed 401k participants, most 401ks don’t let participants pick their own investments, and ETFs are not found on a lot of plan investment menus.
But ETFs are quickly gaining on mutual funds in terms of money invested, with some predicting that ETF assets will surpass those of mutual funds by the middle of this decade.
“Right now, nearly all flows going into mutual funds are funding retirement plans. If ETFs were to replace, or coexist with, mutual funds in retirement offerings, that target date could arrive even earlier,” Dave Nadig, managing director of ETF.com, told MarketWatch last year.
Nadig called 401ks “this giant pot of gold that the industry hasn’t been able to crack.” But with greater public awareness about them (which a Bitcoin ETF would only expand), ETF adoption into retirement accounts may be inevitable as the decade progresses and tomorrow’s 401k participants drive demand.
Think any Millennial and Gen Z 401k participants might be interested in exploring a bitcoin ETF these days?