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Crypto ETF advocates face SEC resistance despite strategic shift

After years of delays and false signs of progress, asset managers looking to start the first cryptocurrency ETF are heading back to the drawing board.

Van Eck Associates — once seen as a frontrunner — shelved its plans for a bitcoin ETF earlier this month, leaving just two contenders seeking approval from the U.S. regulator, data compiled by Bloomberg Intelligence show. That’s a far cry from 18 months ago, when a mass of would-be issuers were duking it out to be first to market.

Since then, btcoin has been on a roller coaster — falling 50%, climbing to its highest in more than a year, and then falling another 40%. Supporters argue that a crypto ETF would give the nascent industry cache and would boost use by retail and institutional investors, but the SEC hasn’t budged. It’s denied or repeatedly delayed plans for bitcoin funds, prompting money managers to overhaul their game plans.

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“It’s far more likely that an ETF would be denied than approved,” said Bloomberg Intelligence analyst James Seyffart. “The primary thing this SEC is concerned about is manipulation and trading in unregulated markets.”

More than 20 separate crypto products have so far sought approval, from funds that plan to hold bitcoin via a digital vault, to those that would buy bitcoin futures, to those that want to use leverage to juice returns, data compiled by Bloomberg Intelligence show. But none of them has been able to pass muster with the SEC.

It doesn’t help that the crypto universe has been plagued by scandals of hacking, theft and manipulation. Meanwhile, the wild and often unpredictable price swings that have at times exceeded double-digit percentages in a single day have spurred the regulator to keep a close eye on volatility.

Asset managers have worked to address the regulator’s worries, including on the issue of custody, but SEC Chairman Jay Clayton said recently that the watchdog still has outstanding concerns. The regulator didn’t immediately respond to a request for comment.

“The primary concern is that there are too many concerns,” said Ryan Giannotto, director of research at GraniteShares, which had two bitcoin ETF proposals denied. “The regulator fundamentally just does not like the idea of a crypto ETF — that’s the long and short of it.”

So asset managers are rethinking their playbooks. VanEck this month started a bitcoin fund that can only be bought by sophisticated investors, and then put its ETF on ice days later. The VanEck SolidX Bitcoin Trust 144A Shares (XPTCZ) is available to qualified institutional buyers, such as hedge funds, but could ultimately pave the way for a retail-focused fund.
The remaining contenders — Bitwise Asset Management and Wilshire Phoenix — are sticking with their ETF proposals but both have sought to differentiate their funds from those that ended up on the scrapheap.

“Our strategy has been we’re going to use the best practices of ETFs generally, we’re going to take no shortcuts,” said Hunter Horsley, Bitwise’s CEO. “We’re going to do the heavy legwork of hundreds of pages of research to show why we don’t have to take shortcuts— and so there will be no compromises in the design of the fund.”

Bitwise’s fund will use prices pulled from 10 exchanges to gauge the value of bitcoin, tackling another regulatory bugbear. The San Francisco-based firm has also briefed SEC staff on industry steps to address their concerns and has started several funds for accredited investors in a bid to prove that these investments work. A decision on the ETF is expected by Oct. 13.

The correlation between fees and performance is not “apples-to-apples when taking the funds’ underlying exposures into account,” an expert says.
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Meanwhile, Wilshire Phoenix wants to offer a mix of bitcoin and short-term Treasurys, using the bills to cushion against crypto volatility. The watchdog announced last week that it would again delay a decision on the proposal, and sought comment on its structure.

“There are numerous features that set it apart from the others,” said Bill Herrmann, Wilshire’s founder and managing partner. This “important mix of features presents the perfect vehicle for investors.”

Still, these asset managers might not have free rein for long. Any sign that the SEC is getting even slightly more comfortable with the concept could spur others to re-enter the race. GraniteShares could return if it can see a solution to the regulator’s problems, said Giannotto, and VanEck hasn’t given up on a bitcoin ETF either, according to Gabor Gurbacs, the company’s director of digital asset strategy.

The 144A product is an “excellent” vehicle for qualified institutional buyers that want ETF-like bitcoin exposure, said Gurbacs. But “we maintain our plans to bring to market a publicly-traded, physical and insured bitcoin ETF.”

Bloomberg News