Good but not exactly there

The probability that the U.S. Securities and Exchange Commission (SEC) approves Bitcoin (Bitcoin) Exchange-traded funds (ETF) before the physical Bitcoin ETF Higher than ever, Chairman’s greetings Gary Gensler’s now frequently repeated preferences For the former.

But the problem is: ETFs built around crypto futures are not the most effective, economical, or easiest way. Products with physical support are. They may attract more assets and open up the cryptocurrency market to more investors. And it is easier for investors to understand them.

This is why it is better for fund issuers to pressure the SEC to clarify the conditions required to obtain Bitcoin spot ETF approval, rather than rushing to become the first finish line for more complex and expensive futures-backed products.

A complete framework-but incomplete reasoning?

One of the main arguments in favor of crypto futures ETFs is that at this moment, the regulatory framework for futures is clear and complete, especially when compared to physical crypto assets.

Futures are within the jurisdiction of the Commodity Futures Trading Commission. The contract is standardized. For Chicago Mercantile Exchange (CME) futures, there is no need for a digital wallet, and the absence of physical assets means there are fewer issues surrounding the crypto custody puzzle. Knowing your customers or KYC is less important, because there are no decentralized assets that can be transferred from one address to another. Generally speaking, the futures market is subject to stricter supervision and monitoring than the current spot market.

related: A New Chapter in Encryption Regulation: The Empire Strikes Back

ETFs supported by these futures Will be registered According to the Investment Company Act of 1940. This will make them “liquidity substitutes” and allow them to use more sophisticated tools or strategies to invest. Mutual funds, including those that use similar hedge fund strategies, are registered as ’40 Act funds.

What are the benefits of registering a Bitcoin futures ETF as a 40 bill fund? They avoided many regulatory hurdles, partly because their task was to invest primarily in futures listed on regulated U.S. exchanges (such as CME).

Futures are more complicated

True, simplicity is good, especially when the goal is to attract new funds that have been patiently waiting. But futures essentially introduce more complexity, which firstly goes against the spirit of ETFs.

ETF aims to be a low-cost, high-liquid alternative to actively managed funds. However, futures are not particularly cost-effective. Compared with other asset classes, they require margin as collateral, and interest rates are disproportionately high.

In addition, the trading volume of exchanges regulated by the United States is relatively low, and most of the transactions occur overseas. This raises the question: Do exchanges approved by the US Securities and Exchange Commission (such as CME) have enough liquidity to meet demand, especially during periods of high volatility?

In practice, in addition to Bitcoin futures contracts, the first-generation futures ETF is likely to consist of a basket of different assets. Due to the complexity of taxation and asset diversification, in order to hold these investments, it is also necessary to establish subsidiaries, usually in low-tax jurisdictions such as the Cayman Islands. Of course, complexity means higher costs for investors.

There is also the issue of the difference between futures prices and spot prices. Futures contracts cannot track the underlying asset perfectly. Especially for Bitcoin, there may be a big difference between the estimated price of Bitcoin within 30 days (the meaning of a futures contract) and the actual price when that date arrives. In the year ending September 2, 2021, the rolling position of Bitcoin futures lags the price of Bitcoin itself by 38 percentage points (295% to 333%, respectively).

Finally, it is worth noting that historically, investor demand for futures-based ETFs is much lower than spot ETFs. To illustrate: The largest gold spot ETF currently holds more than US$50 billion in assets, while the largest gold futures ETF holds approximately US$40 million.

related: The public appeal: Can Bitcoin futures EFT excite US investors?

A reasonable step in the right direction

But does this mean that Bitcoin futures ETFs do more harm than good?

Absolutely not. Although it is not as simple or cheap as spot ETFs, Bitcoin futures ETFs still mark a step in the right direction to provide potential investors with cryptocurrency.

It will open up crypto investment to a wider investment audience. The ETF structure will make it easier for financial advisers and others to integrate Bitcoin into their investment portfolios and standard processes. It will also implement all investor protection measures of the 1940 Act. The strict supervision of the SEC applicable to “Act 40” funds will alleviate the concerns of many investors and conduct governance checks on fund management.

related: The Ethereum ETF is here, laying the foundation for the US to approve BTC and ETH funds

Taking into account the sharp remarks and critical stance taken by the US Securities and Exchange Commission in the recent cryptocurrency discussions, the approval of the Bitcoin futures ETF will be an important step forward. This will show that the SEC is willing to allow encrypted asset products to enter the market more comprehensively through regulatory packaging, which may alleviate recent concerns about excessive government intervention.

But the success of these funds should not divert the issuer’s attention from the main goal: working with the SEC and other regulators to determine the clarity required for an approved spot Bitcoin ETF.

The process may be long, but the result is definitely worth it. It will ultimately provide investors with low-cost, high-liquidity tools to accurately track Bitcoin-so that their crypto investments are better aligned with their overall portfolio. We believe that this will eventually bring about the long-awaited new and massive wave of assets among industry supporters, investors and issuers.

This article does not contain investment advice or recommendations. Every investment and trading action involves risks, and readers should research on their own when making a decision.

The views, thoughts and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Catherine Dowling He is the general counsel and chief compliance officer of Bitwise Asset Management, which manages more than $1 billion in crypto funds. Previously, she served as general counsel and chief compliance officer for True Capital Management and Luminate Capital Partners. Catherine also served as an assistant U.S. Attorney for more than a decade, and most recently worked in the Economic Crimes Department of the U.S. Attorney’s Office for the Northern District of California.