United States v. Crypto ETFs: A Lingering Struggle For Mass Adoption

Huobi, a Singapore-based trading platform currently ranking among the world’s top three cryptocurrency exchanges, has made headlines on June 1 as it unveiled an exchange-traded fund (ETF) that tracks an index of top ten crypto assets against Tether, a digital currency tied to the US dollar.

While an impressive feat that will undoubtedly draw even more retail investors into cryptocurrency trading worldwide, on the global scale this is hardly the first instance of a regulated crypto-based derivative being offered to the public. Sweden, which usually serves as a textbook example for getting crypto-based investment funds right, had introduced bitcoin traded products as early as in 2015.

As pockets of crypto securities emerge in Europe and Asia, one major jurisdiction is conspicuously absent from this map – the United States. Despite numerous efforts on behalf of investment firms to get a regulatory clearance for listing and trading cryptocurrency ETFs on major US exchanges, the Securities and Exchange Commission (SEC) has been reluctant to open the floodgates so far. A closer look at the back-and-forth between the regulatory agency and wannabe pioneers of regulated crypto investment suggests that the SEC’s approval is just a matter of time.

What exactly is ETF?

Exchange-traded funds, or ETFs, are securities that combine diversification of mutual funds with trading capacities of stocks. An ETF tracks an index or a basket of assets that are proportionately represented in the fund’s shares. Along with index mutual funds, ETFs are one of the major mainstream tools for passive investment. Longing for the allure of regulated securities, many in fintech community consider the emergence of traded crypto funds a milestone on the way to mass adoption. Serving as a liaison between the world of crypto exchanges, which remains obscure to many cautious investors, and more traditional financial tools, crypto ETFs should significantly broaden the scope of actors tapping into the pool of digital wealth.

A relatively new yet already fairly established financial instrument, ‘regular’ ETFs are commonly associated with lower investor risks than individual stocks. Indeed, when one buys into a basket of multiple assets, they are guarded from ups and downs that single stocks are prone to. Losses from underperforming assets are mitigated by gains from those that appreciate at a faster speed, while the overall growth of industries, markets, and indices drives the value of fund shares up over time. As the famous bet initiated by Warren Buffett showcased, an index fund (an instrument organized by the same principle as an ETF but not necessarily traded on the exchange) over a span of a decade massively outperformed a collection of hedge funds carefully selected by a Wall Street asset manager.

How are they supposed to work in crypto

There are several ways in which an exchange-traded product can be tied to digital assets. The most straightforward one is by actually purchasing and storing cryptocurrency, so as to divide shares of its ownership among the fund’s stakeholders. Early crypto filings to the SEC in the spring of 2017 followed this model. Another option, adopted by the second wave of applicants later in the year, is an ETF that owns bitcoin futures.

One of the earliest precursors of crypto ETFs on US soil sprang from Tyler and Cameron Winklevoss’ work on a bitcoin price index, named, well, Winkdex. The news that the twins’ attorneys were working to lay the legal ground for an exchange-traded fund tied to bitcoin’s price surfaced immediately after the index itself went live in early 2014. The effort appeared to be no mean feat, as it wasn’t until March 2017 that the Winklevosses had finally filed a formal application before the Securities and Exchange Commission. Bitcoin price surged in anticipation of the ruling, but the SEC’s fateful decision came as a downer for the twins and the industry at large…

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