To meet the frenzied demand for Bitcoin assets, two major firms will begin offering shares of a limited version of a crypto exchange-traded fund this week, as outlined by The Wall Street Journal. This move will be enabled by a “workaround” that allows the crypto ETFs to trade without SEC approval. Ultimately, this could pave the way to offering regulated crypto ETFs to mainstream investors as part of the $3.9 trillion ETF market.
Limited Crypto ETF Available to 'Qualified Institutional Buyers'
Van Eck Securities Corp. and SolidX Management LLC are employing the U.S. Securities and Exchange Commission’s (SEC) Rule 144A, which will exempt the shares of the limited crypto ETF from securities registration and allows for private placements of securities to “qualified institutional buyers.” The caveat is that the shares can only be sold to certain institutional buyers, such as hedge funds, brokers and banks. That means that VanEck’s SolidX Bitcoin Trust shares will not be open to retail investors or individual buyers.
“Unlike an ETF it isn’t listed on a national exchange, rather it is quoted on the OTC Link ATS platform. This is a first-of-its-kind type of offering. Given it will trade over-the-counter via broker-to-broker transactions, we’ve been casually referring to it as a Broker Traded Fund, a BTF,” said Ed Lopez the head of ETF product at VanEck, according to CoinDesk.
Crypto Into the Mainstream
The launch of the fund from Van Eck and Solid Management demonstrates the push for cryptocurrencies such as Bitcoin, the largest digital asset by market capitalization, to gain access to mainstream investors.
“The shares will provide institutional investors access to a physically-backed bitcoin product that is tradeable through traditional and prime brokerage accounts,” read a joint press release. “The shares are the first institutional-quality, cleared product providing exposure to bitcoin and enabling a standard ETF creation-and-redemption process.”
Digital assets such as Bitcoin have risen almost three-fold this year, but have fallen nearly 20% off their summer high. The brutal selloff in the crypto world after a record breaking bubble at the end of 2018 appeared to significantly weaken both retail and institutional interest. Still, there is a potentially large first-mover advantage for the firm that can get a Bitcoin ETF approved.
Regulatory Hurdles, Risks
All this comes as crypto remains a risky and relatively immature market. Many are wary of crypto ETFs, given the fact that while there is broader mainstream interest and adoption of digital assets, the just over a decade-old market is still largely unregulated.
The U.S. Securities and Exchange Commission (SEC) has repeatedly denied attempts to market Bitcoin-based investments assets. While earlier this year, SEC Commissioner Robert Jackson indicated that he expects an ETF proposal to “eventually” meet the SEC’s standards, the government agency delayed decisions on Bitcoin ETF proposals by Bitwise Asset Management, VanEck/SolidX, and Wilshire Phoenix. Decisions have been postponed for later this month and into October.
The main causes for concern cited by the SEC are widespread fraud and market manipulation in the nascent industry.
Despite the risks, VanEck and SolidX are hopeful that their limited version of a crypto ETF will support the notion that a true Bitcoin ETF can operate smoothly. Crypto bulls view an ETF as a better way for investors not familiar with cryptocurrencies to gain exposure to the sector.
“We continue to support market structure developments in the digital asset space. This Qualified Institutional Buyers (QIBs) only 144A Bitcoin product may pave the way for institutional Bitcoin adoption and showcase that an appropriately regulated ETF structure can work in practice,” said Gabor Gurbacs, director of digital asset strategies at VanEck/MVIS.
Investors in the limited crypto ETF will be insured against “theft or loss” of Bitcoin private keys held by the trust, and will be offered open-ended creation and redemption of shares, per CoinDesk.