Managers hope ‘proxy’ bitcoin funds will finally win SEC approval

US asset managers are attempting to sidestep the Securities and Exchange Commission’s apparent reluctance to approve bitcoin exchange traded funds with applications for products that will provide “proxy” exposure.

The filings with the SEC come as exchange traded products that track the price of the cryptocurrency are already up and running in Sweden, Switzerland, Jersey, Germany and Canada.

Several applications have already been lodged with the SEC for straightforward bitcoin ETFs. Now two fund managers are hoping their bitcoin-related proposals will be the first to get the go-ahead in the US.

KKM Financial, a Chicago-based “boutique investment solutions firm”, has filed for approval to launch the Valkyrie Innovative Balance Sheet ETF.

This would invest “principally in the securities of operating companies . . . that directly or indirectly invest in, transact in, or otherwise have exposure to bitcoin or operate in the bitcoin ecosystem”.

Issuers are going to get creative in order to find ways to service the demand

This could include bitcoin trading platforms, miners, custodians, digital wallet providers and payment facilitation.

Separately, JPMorgan Chase has filed to launch a structured note based on the equity performance of the 11 companies that constitute the JPMorgan Cryptocurrency Exposure Basket.

Just two companies would constitute 38 per cent of the basket; MicroStrategy, a software company that, as of early February, had $3.2bn of bitcoin on its balance sheet, almost half of its then $6.6bn market capitalisation; and Square, the payments company founded by Twitter co-founder Jack Dorsey, which also holds more than $200m of the cryptocurrency on its balance sheet. The list does not include Tesla, which last month disclosed a $1.5bn holding in bitcoin.

“Issuers are going to get creative in order to find ways to service the demand,” said Nate Geraci, president of the ETF Store, an advisory firm.

The applications come as Europe has already approved 23 cryptocurrency ETFs, which had combined assets of $6.3bn at the end of February, according to ETFGI, a consultancy. The first two Canadian bitcoin ETFs, which only launched days earlier, had already amassed a total of $496m by the same point.

A third bitcoin ETF has since debuted on the Toronto Stock Exchange, while there are pending filings for at least five more, including an inverse bitcoin fund proposed by Horizons ETFs for its BetaPro range.

Deborah Fuhr, co-founder of ETFGI, said the launch of bitcoin ETPs in Canada has created less of a premium for other bitcoin vehicles, such as the Grayscale Bitcoin Trust, showing “that an ETF is a better, more efficient structure”.

VanEck and WisdomTree, two of the top 10 ETF issuers in the US, have both filed applications with the SEC to launch plain vanilla bitcoin products, as have KKM, under the Valkyrie name, New York Digital Investment Group and Kryptoin Investment Advisers. There is speculation that Grayscale will follow suit after it posted listings to hire nine ETF-related staff.

However, the SEC has voiced concerns around potential “fraudulent and manipulative acts and practices” and a need “to protect investors and the public interest”.

Jeff Kilburg, lead portfolio manager on KKM’s proposed Innovative Balance Sheet ETF, said the ETF’s underlying model had the potential to be a “bridge” that could “serve as a proxy to investors looking for access to bitcoin”, particularly for pension funds and endowments that may not be permitted to invest in bitcoin directly and retail investors who may have trepidation about direct investment.

KKM has identified close to 50 companies worldwide that hold bitcoin on their balance sheet, a number Kilburg expects to double by the end of the year. The early adopters are dominated by technology companies, but he envisaged others, such as banks, also taking steps in this direction.

The SEC’s unwillingness to approve any straight up bitcoin ETFs so far is increasingly puzzling some observers.

Geraci said: “The market could have supported a bitcoin ETF several years ago. It’s well past its time — we have a fully functioning bitcoin futures market that is robust and is a regulated venue, we have products in Europe, we have regulated exchanges like Coinbase, but for whatever reason the SEC has set a higher barrier for an ETF.

“The Commodity Futures Trading Commission has approved bitcoin futures for trading. Another government agency, the SEC, won’t approve a product that can hold the same futures contracts. That seems incongruous to me.”

Likewise, Fuhr said: “If the regulator is happy to have similar products, whether open or closed-ended funds, why would an ETF that does the same thing not be allowed?”

She argued that the “robustness” of cryptocurrency exchanges had increased in recent years and that “products in Europe and Canada are working properly”.

Geraci, who believed the SEC would approve a bitcoin ETF this year, said regulators had “painted themselves into a difficult corner because first-mover advantage is hugely important in this space”.

As a result, he expected to see a flurry of further applications. “My expectation is that we will see some other large issuers attempt to get involved in bitcoin ETFs.”

“Having two of the larger issuers is a pretty big endorsement of the space. Every issuer that wants to have a piece of the bitcoin space has got to get involved fast,” he added.

BlackRock, though, said it had “no plans for a bitcoin or any other cryptoasset ETF” even though the world’s largest asset manager had filed with the SEC to add bitcoin futures as an eligible asset in its Global Allocation and Strategic Income Opportunities funds.

Geraci said there was “no question” certain clients would have interest in bitcoin ETFs.

“Young clients are much more interested in owning bitcoin than physical gold, for example. It’s an uncorrelated asset that marches to the beat of its own drum. A small amount can potentially improve risk-adjusted returns.”