This article is from cointelegraph.com.br and the original article can be read here in Portuguese
ETFs are increasingly present themselves as an alternative of exposure to crypto-assets in a safe and regulated way for investors around the world. Since they started being offered on B3 a year ago, ETFs of cryptocurrencies have been conquering the preference of Brazilian investors.
Currently, HASH11 is already the second most traded index fund on the Brazilian stock exchange less than a year after its launch by the asset manager Hashdex. The ETF is linked to the Nasdaq Crypto Index, an index developed by Hashdex in partnership with the US technology sector exchange that seeks to reflect the movement of the crypto market through exposure to a varied basket of digital assets.
The success of HASH11 has seen Hashdex and QR Capital offer a diverse range of ETFs reflecting different sectors of the cryptocurrency market. Two of them offer indirect exposure to Bitcoin (BTC), the biggest cryptocurrency on the market, but there are also ETFs that offer exposure to Ethereum (ETH), to DeFi industry tokens, web3 protocols, and even the NFTs. In all, there are 9 cryptocurrency-linked ETFs currently trading on B3.
Brazil is not at the forefront just because of the number of options offered to investors. The country was the third, after Canada and Bermuda, to approve an ETF that reflects the price of Bitcoin on the spot market. And there are not just one, but two index funds pegged to the biggest cryptocurrency on the market: the QBTC11from QR Capital, and the BITH11from Hashdex.
Bruno Sousa, director of Global Expansion at Hashdex, stated that the CVM and the exchange understood the importance of the product, given that there was a growing demand for investments in crypto assets last year in Brazil. However, negotiations for launches of index funds linked to cryptocurrencies on B3 had been underway since 2019, highlighted the executive:
“It took two and a half years of discussion with the CVM and B3 to get approval in April last year. The product was structured in a way that fit the rules. The regulator does not work in a vacuum. It reacts to requests participants, the stock market, managers, the investing public. Based on the demand, they realize that they need to position themselves.”
Resistance in the USA
Meanwhile, in the US, the world’s largest financial market, the Securities and Exchange Commission (SEC) continues to deny requests to register an ETF along the lines of QBTC11 and BITH11. To date, the SEC has only approved ETFs linked to futures contracts of Bitcoin. These investment products are considered securities under US law, unlike cryptocurrencies.
According to specialists and Brazilian market operators interviewed in a report by Valor Investe published this Wednesday, 20, the SEC’s resistance to the approval of ETFs linked to the price of Bitcoin on the spot market is justified for several reasons.
From the absence of control mechanisms in the formation of asset prices and in the regulation of cryptocurrency trading platforms and financial investment products linked to them, to political lobbying.
To this day, however, consumer protection is believed to be the main reason for the SEC’s denials. Which is still contradictory, given that more than one ETF of futures contracts was approved recently, and that the Bitcoin is traded on exchanges based in the country.
The decentralized nature of the main cryptocurrency on the market limits the regulatory capacity of financial agents, as Marcos Viriato, president of Parfin, pointed out to the report:
“One of the main problems that the SEC sees is that the underlying asset, that is, Bitcoin, is not regulated and can suffer price manipulation, as it is traded on several brokers around the world, which do not have the controls required by the regulation that aimed at protecting the final investor”.
Alexandre Ludof, investment director at QR Capital, manager of QBTC11, points out another incongruity of the US Securities and Exchange Commission, drawing a parallel with the GBTC, the ETP (exchange traded product) of Grayscale which has more than $30 billion in assets under management:
“This instrument is worse than ETFs. An ETP cannot be sold in less than 3 months, for example, and it has no liquidity in the secondary market like ETFs. So you have to trade it at a discount, the price of GBTC is usually lower than of Bitcoin [no mercado Ă vista] for this liquidity issue.”
Grayscale itself has repeatedly reiterated its intention to convert the GBTC into an ETF once the SEC authorizes it to trade in the market as an index fund.
The first application for registration of an ETF linked to the price of Bitcoin on the spot market was made in 2013 by the Winklevoss brothers, founders of the Gemini exchange. In 2018 there was a new request, which was also denied.
When Gary Gensler assumed the presidency of the SEC in February 2021, the expectation was created that the Bitcoin ETF could finally be approved. Gensler had taught a course on cryptocurrencies at MIT (Massachusetts Institute of Technology) and in theory would be a more industry-friendly leader.
However, once again the expectations of the crypto community were dashed. In his latest statements, Gensler has defended that the same rules that apply to financial instruments in the traditional market should be used for the evaluation and authorization of investment products linked to digital assets.
“There is no reason to treat the cryptocurrency market differently just because a different technology is used,” said the chairman of the SEC during the Penn Law Capital Markets Association Annual Conference earlier this month.
Executive order and institutional investors can contribute to approval
According to the experts heard by the Valor Investe report, two factors may contribute to the SEC’s approval of the first ETF linked to the Bitcoin spot price: the executive order on cryptocurrencies of the president Joe Biden presented in March of this year and the adhesion of institutional investors of weight and relevance in the North American market, as Goldman Sachs, Bridgewater Associates and BlackRock.
For QR Capital’s Ludof, the executive order was very positive for the industry with its willingness to “preserve the idea of ​​the American spirit, economic freedom and innovation”.
The text contradicts those who still insist on pointing out the lack of ballast as a fatal flaw of the main cryptocurrency on the market by stating that “Bitcoin’s ballast is trust, network, technology and protocol; the rule defined in mathematical code that cannot be changed.”
Also according to the text of the executive order, cryptocurrencies require a “new mental paradigm” so that they can be accepted, understood and incorporated into the contemporary world.
Recently the SEC approved the fourth ETF linked to Bitcoin futures contracts. This time, however, the approval process was based on the “Securities Act of 1933”, whose approval depends on proof that the underlying asset of the financial product offers guarantees against price manipulation.
Previously approved ETFs were approved under the provisions of the Investment Company Act of 1940, which do not require such proof. Second, Michael Sonnenshein, CEO of Grayscale, the approval of the new ETF under the parameters of the 1933 law paves the way for approval of the long-awaited Bitcoin ETF in sight:
“If the SEC is comfortable with a #ETF of futures #Bitcoin, it should also be comfortable with a Bitcoin ETF in sight. And they can no longer cite the 1940 Law as a differentiating factor.”
Bloomberg analyst Eric Balchunas endorsed Sonnenshein’s opinion, but made the caveat that the lack of regulation of cryptocurrency exchanges is still an obstacle for the Bitcoin ETF in sight:
“SEC approves Teucrium Bitcoin Futures ETF. Notable because it was registered under the Law of 33, which Genz said does not have sufficient protections against the Law of 40. So, possibly, this is a good sign for the spot, although we still think exchanges need regulations before giving the green light.”
As Cointelegraph Brasil reported, the first Bitcoin ETF approved in Australia will start trading next week. Estimates indicate that the investment product can attract US$ 1 billion.