How, when and where will regulators accept Bitcoin ETFs?

Rage Review : Will Bitcoin exchange-traded funds (ETFs) be accepted by regulators in the United States or other countries? This is an extremely complex question. Ryan Radloff, head of investor relations at Swedish issuer XBT Provider, said that it is a chicken-and-egg problem between banks and regulators. U.S. regulators want to see stability and transparency before they can approve a product that will bring a lot of money to this emerging market. But in any case, it is best for investors and cryptocurrencies to be fully cautious.

Translation: Clover

Whether a bitcoin exchange-traded fund (ETF) will be accepted by regulators in the United States or elsewhere is a more complex question than it initially appears, say, to industry participants.

A more appropriate question would be: Do regulators, specifically, need convincing? After all, the agencies charged with enforcing existing laws take into account a lot of input from multiple parties, including banks, many of which have yet to embrace digital currencies, which are still in their infancy.

That’s the point made by Ryan Radloff, head of investor relations at XBT Provider, a Swedish issuer that has successfully listed a bitcoin exchange-traded bond on a public exchange.

“It’s a bit of a chicken-and-egg situation between banks and regulators,” Radloff said.

“We probably won’t see many big banks rushing into action until regulators are comfortable.”

Different approaches

At this point, even within the United States, different regulators have different approaches to cryptocurrencies like Bitcoin, which is a form of asset for the IRS, a virtual currency for FinCEN, and a medium of "money transmission" for state regulators.

The U.S. Securities and Exchange Commission (SEC) has yet to take an official stance on Bitcoin’s classification, but in the meantime, the agency has so far rejected two applications for Bitcoin exchange-traded funds (the Winklevoss Bitcoin ETF and the SolidX Bitcoin Trust).

Chris Burniske of investment management firm ARK Invest, which offers ETFs based on emerging technologies, said the overall outlook is not looking good right now.

“That was a very harsh stance on their part,” Burniske said of the SEC’s recent rejection of an ETF application. “It’s clear that more work needs to be done to get the SEC to approve these types of funds.”

Radloff agreed, saying:

“Based on the responses so far, things are not looking good for bitcoin products in the U.S. in terms of regulatory approval, but that is likely to change.”

However, ETFs are not the only option for public investing.

Burniske said futures contracts overseen by another U.S. regulator, the Commodity Futures Trading Commission (CFTC), could be the first to achieve this. The CFTC has already begun considering bitcoin as a commodity.

What about outside the United States?

The global regulatory environment has changed significantly but has generally improved.

“You would expect the country with the most innovative regulators in ‘traditional finance’ to have the most favorable regulatory environment for new financial innovation,” Radloff explained.

He continued: “This includes Jersey, Switzerland, Malta, Gibraltar, Japan and Sweden. However, over the past 18 months, it has become clear that more and more governments have provided guidance on Bitcoin transactions,” adding:

“As this field matures, we expect more and more government agencies to continue to enter the field.”

It is worth noting that there are also exchange-traded Bitcoin products in Europe, but they are not ETFs, but exchange-traded notes (ETNs), which are similar to ETFs but with different risks. However, Radloff said that European investors and regulators are more accustomed to the ETN format.

COINXBE & COINXBT's ETN was successfully launched on Nasdaq Nordic. Another ETN-type Bitcoin product was recently delisted from the Gibraltar Stock Exchange.

Nick Cowan, managing director of the Gibraltar Stock Exchange, said he expected two similar bitcoin products to be listed soon, and possibly a third based on a basket of cryptocurrencies.

“We have a large regulatory body that is responsible for moving this process forward with external consultation,” Cowan told CoinDesk.

Self-regulatory market

But what about those criticisms that the market is immature? Today, there are very few data points with which to evaluate these claims.

A recent study by the Global Cryptocurrency Benchmarking Project of the Cambridge Centre for Innovative Finance at the University of Cambridge found that only 46% of the cryptocurrency trading platforms participating in the survey had obtained government licenses.

There are also some differences between regions: 85% of trading platforms in the Asia-Pacific region are unlicensed, while 78% of trading platforms in North America are unlicensed.

This difference partly reflects the fact that China has no formal regulations for the industry.

Additionally, nearly all of the trading platforms investigated by the Cambridge researchers have deployed their own compliance programs, even if the exchanges are not formally licensed, to comply with know-your-customer and anti-money laundering requirements.

Garrick Hileman, an economic historian at the University of Cambridge and the London School of Economics, said bitcoin industry participants have made great progress in compliance over the years.

“Self-regulation and internally driven compliance programs are a big part of this whole thing,” Hileman said, adding:

“Compliance is strengthening in line with the overall maturity we are seeing across the cryptocurrency industry.”

Rest and recuperate first, then advance westward?

It’s clear that U.S. regulators want to see stability and transparency before approving products that could attract large amounts of money in a market that’s less than a decade old.

However, industry experts also said that the SEC's comparison of Bitcoin's stability and transparency to the stock market is like comparing apples to oranges, and a more comparable comparison might be products like gold and oil - the markets for these products are often very opaque (for example, OPEC's decisions), but their ETFs are thriving.

Communicating these issues to regulators is critical.

Meanwhile, the Winklevoss Bitcoin ETF is appealing the SEC’s rejection of its application, and an ether-based fund called the EtherIndex Ether Trust is applying for an ETF.

The SEC declined to comment when asked if it would treat the Ethereum-based fund differently, but in its official notice of the fund’s application, the agency acknowledged at least one major difference: “Ether, unlike Bitcoin, does not function solely as a store of value.”

Ultimately, Ark Invest’s Burniske said it’s best for investors to err on the side of caution, especially when it comes to cryptocurrencies, as the huge demand for ETFs could weigh on a still-developing market.

The first gold ETF bought $40 million a day in its first 30 days, but it is estimated that the ETF could attract up to $300 million in funds to the cryptocurrency market.

Given this potential boost, it’s no wonder investors remain so interested — and it’s likely to be something worth striving for for innovators.