The SEC is pitching a shutout against Bitcoin-based ETFs, and not even Fidelity’s storied name may be enough to overcome the obstacles.
With more than 35 million customers, $21 billion in revenues and $3.8 trillion in discretionary managed assets, Fidelity Investments is one of the largest investment management companies in the world. It may need all its heft to break the losing streak of crypto-fund sponsors that have gone up against the United States Securities and Exchange Commission.
As reported, Fidelity filed with the SEC on March 24 a preliminary registration statement on behalf of its Wise Origin Bitcoin Trust — an exchange-traded fund that would track the performance of Bitcoin as measured by its Fidelity Bitcoin Index. This followed similar SEC filings this year from WisdomTree, CBOE/VanEck, NYDIG Asset Management, Valkyrie Digital Assets and SkyBridge Capital.
A Fidelity Bitcoin fund would be an event of some historic importance. According to Nik Bhatia, author of the book Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies and adjunct professor of finance and business economics at the University of Southern California, this would be bigger than Elon Musk buying $1.5 billion in Bitcoin (BTC) for Tesla’s corporate treasury, more significant than PayPal allowing its users to buy, sell and hold cryptocurrency, and greater than Coinbase’s upcoming initial public offering.
“It would bring the final stamp of legitimacy to Bitcoin,” Bhatia told Cointelegraph, and it could happen relatively soon. “I imagine that [CEO] Abby Johnson and Fidelity have filed, knowing they will get approved, and I now think it’s probably less than 12 months away.”
Nigel Green, founder and CEO of deVere Group — an independent financial advisory organization — told Cointelegraph, that if the SEC approves Fidelity’s BTC plans, it would mean “another major step into the mainstream for cryptocurrencies. It will also, inevitably, prompt more institutional investors into the already burgeoning cryptoverse.”
Not all are sure, though. “The Fidelity name is important, but it may not be big enough to overcome the other hurdles,” Georges Ugeux, adjunct lecturer in law at Columbia University Law School, told Cointelegraph. Among those hindrances are the crypto funds’ lack of diversification, illiquidity and, at least in the short term, the fact that the agency still doesn’t have a confirmed chairman.
Lennard Neo, head of research at Stack Funds — a crypto index fund provider — told Cointelegraph: “We have seen many ETFs being rejected by the SEC citing manipulation and market size as concerns.” Still, the cryptocurrency space has grown significantly over recent years and matured into an emerging new asset class. “If one keeps knocking on the door, it will eventually open.”
There are reasons, however, why approval of Bitcoin ETFs are unlikely in the immediate future, Michael Venuto, co-founder and chief investment officer of Toroso Investments, told Cointelegraph. “The SEC role is investor protection. Approving an ETF of Bitcoin could be seen as an endorsement that may run counter to more powerful forces within our government.” More clarity is still needed “at the federal, fiscal, tax and other regulatory levels” before the agency will approve a BTC fund, he said.
Concentration and liquidity concerns
Regulators are worried about, among other things, concentration risk — i.e., the possibility of “amplified losses” because holdings aren’t sufficiently diversified — a risk that may be particularly pronounced with a Bitcoin fund. In its S-1 filing, Fidelity itself acknowledged that:
“Unlike other funds that may invest in diversified assets, the Trust’s investment strategy is concentrated in a single asset within a single asset class. This concentration maximizes the degree of the Trust’s exposure to a variety of market risks associated with bitcoin and digital assets.”
With equity funds, the SEC doesn’t want any single stock to comprise more than 25% of an ETF’s basket size as measured by market capitalization, Ugeux told Cointelegraph. Bitcoin isn’t an equity, of course — it’s more like a commodity, at least according to the Commodity Futures Trading Commission and recent statements by senior SEC officials — but a Fidelity BTC would appear to really stretch the SEC’s concentration rules.
Another possible concern is liquidity, added Ugeux. ETF sponsors are supposed to be continuously purchasing and selling the fund’s underlying assets — to protect the sponsor so it isn’t holding too much itself — but here again, a Bitcoin fund can be problematic because its underlying assets are not (relatively) liquid securities.
Fidelity acknowledged in its filing its ability to sell Bitcoin could be affected by limited trading volume, lack of a market maker, or legal restrictions — indeed, a “governmental authority may suspend or restrict trading in Bitcoin altogether.” The filing added: “Bitcoin is a new asset with a very limited trading history. Therefore, the markets for bitcoin may be less liquid and more volatile than other markets for more established products.”
Still, these problems could be surmountable. “It seems a question of when — not if — the SEC will approve a Bitcoin ETF,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA, in a public statement that he shared with Cointelegraph. Additionally, when approval does come, he said that:
“We expect multiple firms to receive the go ahead because the [regulatory] concerns were more with Bitcoin inside an ETF than anything specific to an individual proposal. Firms with an established ETF presence and broad distribution would have the advantages over others.”
As noted, some half dozen firms have filed with the U.S. SEC for crypto ETFs this year. Could any of them beat Fidelity to the punch, and if so, would they have anything close to the impact of a Fidelity ETF?
“I don’t think Fidelity has an advantage in getting approved,” Venuto told Cointelegraph. “The only one with a slight advantage is VanEck since they were the first of the current class to file for a 19b-4 rule change” — which made it easier to list ETFs.
Felix Shipkevich, an attorney specializing in cryptocurrency-related legal and regulatory matters at Shipkevich PLLC, told Cointelegraph: “All of the ETF Bitcoin applicants are game-changers” — i.e., not just Fidelity. Even with the regulatory ambiguity in the cryptocurrency space, “I have yet to see an ETF application from anything less than a first-tier financial services firm.”
Even if approval is eventually given, it may not happen so fast. Hester Peirce, a commissioner at the SEC and sometimes referred to as “Crypto Mom” for her support of cryptocurrencies, addressed the matter of ETFs in a recent speech, and “she did not give the impression that one [i.e., approval] would come through immediately,” said Ugeux. Approval(s) may take additional time, too, because Gary Gensler still hasn’t officially been confirmed as SEC chairman almost two months after his nomination, he added.
From Peirce’s speech, one might even conclude that the SEC had dug itself into a bit of a hole because it had delayed BTC fund approval for so long. Not only has the SEC’s “reluctance to permit traditional investment vehicles to hold Bitcoin or Bitcoin futures has contributed to investors seeking more expensive, less convenient, or less direct substitutes,” she said, “but it also has heightened the stakes of any regulatory approval for a mainstream retail product we might one day grant.”
The waiting has “magnified the first-approved advantage” for any Bitcoin ETF, and should the agency allow one now, investors might think the SEC is giving its “blessing” to that particular product — which would be the wrong inference to take, Peirce added.
Crypto cynics are “on the wrong side of history”
Whatever the circumstances — whether alone or as part of a group, whether sooner or later — “an ETF launched by one of the biggest mutual funds in the world definitely makes a statement,” said Neo regarding the Fidelity filing.
He continued: “It emphasizes the maturity and acceptance in Bitcoin” and would bring more institutional investors to the cryptoverse but also retail investors “with a low-cost, flexible alternative to efficiently diversify their portfolio into digital assets.”
“Staggeringly,” Green told Cointelegraph, “there are still some ‘experts’ who claim that digital currencies are not the future of money. The move by this investment giant to launch a Bitcoin ETF further underscores that cryptocurrency cynics are on the wrong side of history.”