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Crypto funds batting .000 against SEC

by Serge Shlykov

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With more than 35 million clients, $21 billion in revenue and $3.8 trillion in assets under management, Fidelity Investments is one of the largest asset managers in the world. It may take all the strength we can muster to break the losing streak of crypto-funders who have taken on the U.S. Securities and Exchange Commission.

The 24th. In March, Fidelity reportedly filed a pre-registration application with the Securities and Exchange Commission on behalf of its Wise Origin Bitcoin Trust, an exchange-traded fund that will track the performance of bitcoin as measured by its Fidelity Bitcoin Index. This year, WisdomTree, CBOE/VanEck, NYDIG Asset Management, Valkyrie Digital Assets and SkyBridge Capital filed similar SEC filings.

The Fidelity Bitcoin Fund will be an event of historic significance. According to Nick Bhatia, author of Layered Money: From gold and dollars to bitcoin and central bank digital currencies. As an associate professor of finance and business administration at the University of Southern California, this would be more than Elon Musk’s $1.5 billion purchase of bitcoin (BTC) for Tesla’s coffers, more than PayPal allowing its users to buy, sell and hold cryptocurrencies, and more than Coinbase’s upcoming IPO.

This will bring the final seal of legitimacy to bitcoin, Bhatia told Cointelegraph, and it could happen relatively quickly. I think Abby Johnson and Fidelity filed knowing they would be approved and now I think it is less than 12 months.

Nigel Green, founder and CEO of deVere Group, an independent financial advisory firm, told Cointelegraph that if the SEC approves Fidelity’s BTC plans, it would mark another big step into the mainstream of cryptocurrency. It will also inevitably push more institutional investors into cryptocurrencies, which are already growing rapidly.

But not everyone is sure. Name-calling is important, but perhaps not enough to overcome other obstacles, Georges Huguet, associate professor of law at Columbia Law School, told Cointelegraph. These obstacles include the lack of diversification of crypto funds, illiquidity and, at least in the short term, the fact that the agency does not yet have a certified chairman.

Lennard Neo, head of research at Stack Funds, a provider of cryptocurrency index funds, told Cointelegraph: We have seen many ETFs rejected by the SEC, citing manipulation and market size as a problem. Nevertheless, the cryptocurrency sector has grown rapidly in recent years and has become a new emerging asset class. If you keep knocking on the door, it will eventually open.

However, there are reasons why a bitcoin ETF is unlikely to be approved in the near future, Michael Venuto, co-founder and chief investment officer of Toroso Investments, told Cointelegraph. The Securities and Exchange Commission’s job is to protect investors. Approval of the Bitcoin ETF could be seen as an endorsement at odds with stronger forces within our government. More federal, fiscal and regulatory clarity is needed before the agency approves the BTC fund, he said.

Concentration and liquidity

Among the regulators’ concerns is concentration risk – the possibility of greater losses due to a lack of diversification of holdings – a risk that could be particularly pronounced in the bitcoin fund. In its S-1 application, Fidelity itself acknowledged that:

Unlike other funds that may invest in diversified assets, the Trust’s investment strategy focuses on a single asset within a single asset class. This concentration maximizes the Trust’s exposure to the various market risks associated with bitcoin and digital assets.

For equity funds, the SEC doesn’t want a single stock to make up more than 25% of an ETF basket, as measured by market capitalization, Ugeos told Cointelegraph. Of course, bitcoin isn’t a stock – it’s more of a commodity, at least according to the Commodity Futures Trading Commission and recent statements from top SEC officials – but it seems that Fidelity BTC is really deviating from the SEC’s concentration rules.

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Another potential problem is liquidity, Ugeo added. ETF sponsors are expected to buy and sell the fund’s underlying assets on an ongoing basis – to prevent the sponsor from holding too many assets – but again, a bitcoin fund can be problematic because the underlying assets are not (relatively) liquid securities.

The Fidelity-approved application may suffer from limited trading volume, the lack of a market maker, or regulatory restrictions – in fact, a government agency may generally suspend or restrict the exchange of bitcoin. File added: Bitcoin is a new asset with a very limited trading history. As a result, bitcoin markets can be less liquid and more volatile than other markets for more established products.

However, these problems can be overcome. The question seems to be 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 he shared with Cointelegraph. When the approval was given, he also stated the following:

We expect that several companies will have the opportunity to move forward, because the [regulatory] concerns were about bitcoin within the ETF and not about another specific offering. Firms with an established ETF presence and broad distribution will have an advantage over others.

As mentioned earlier, about half a dozen companies have filed crypto-ETFs with the U.S. Securities and Exchange Commission this year. Can any of them beat Fidelity, and if so, will they have the clout of a Fidelity ETF?

I don’t think Fidelity has an advantage when it comes to getting support, Venuto told Cointelegraph. The only one with a slight advantage is VanEck, as it was the first in the current class to apply for the Rule 19b-4 amendment, which makes it easier for ETFs to list.

Felix Shipkevich, a lawyer specializing in legal and regulatory issues surrounding cryptocurrency at Shipkevich PLLC, told Cointelegraph: All participants in bitcoin ETFs are changing the game – so it’s not just Fidelity. Even with the ambiguity in cryptocurrency regulation, I have yet to see an ETF application from a leading financial services company.

Looks like it: Bitcoin ETFs may be coming to the US, but not all cryptocurrency investors think this is necessary.

Even when permission is eventually obtained, it may not be so quick. Securities and Exchange Commission Commissioner Hester Pierce, sometimes nicknamed Crypto Mama for her support of cryptocurrencies, addressed the issue of ETFs in her recent speech, and she was not under the impression that approval would be immediate, Ugyo said. The approval(s) could also take additional time, as Gary Gensler has still not been officially confirmed as chairman of the SEC, nearly two months after his appointment.

It could even be concluded from Mr. Pierce’s speech that the SEC has dug itself a small hole by delaying approval of the BTC fund for so long. Not only has the SEC’s reluctance to allow traditional investment vehicles to hold bitcoin or bitcoin futures contributed to investors seeking more expensive, less convenient or less direct substitutes, she said, but it has also raised the stakes for any regulatory approval for a core retail product that we might one day grant.

The expectation increased the approved initial yield for each bitcoin ETF, and if the agency allows it now, investors might think the SEC is giving its blessing to this particular product – which would be the wrong conclusion, Pierce added.

Crypto-cynics on the wrong side of history

Either way, whether on its own or as part of a group, sooner or later the ETF launched by one of the world’s largest mutual funds is sure to make a statement, Neo said of Fidelity’s application.

He continued: It highlights the maturity and acceptance of bitcoin and will attract more institutional investors in crypto-currencies, as well as retail investors with a flexible, low-cost alternative to effectively diversify their portfolio into digital assets.

Surprisingly, Green told Cointelegraph that there are still experts who argue that digital currencies are not the future of money. The investment giant’s decision to launch a bitcoin ETF shows once again that cryptocurrency cynics are on the wrong side of history.

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