Skip to content

WisdomTree is testing the SEC acceptance threshold for Bitcoin with the latest ETF application

June 20, 2020

Many investment firms have launched cryptocurrency exchange funds, but so far none has been favored by the U.S. Securities and Exchange Commission.. However, companies are still trying, and last week launched two applications for products that resemble cryptocurrency ETFs when no pure Bitcoin ETFs emerged.

WisdomTree, an asset manager and ETF specialist, Submitted on June 16 to the agency a N-1A registration statement for an ETF that would invest up to 5% of its portfolio in cash-settled (BTC) futures contracts offered by the Chicago Mercantile Exchange.

WisdomTree almost applied to the SEC for a regulated stable coin in January, which was considered a potential stalking horse for a crypto ETF offering at the time. Now it has actually gone this way, but with a BTC component that is so small that the SEC can barely notice it or take care of it. Derek Acree, co-founder and legal advisor to DeFi Money Market, a decentralized financial ecosystem, told Cointelegraph: “This is not a new tactic, but a calculated plan to examine closely what the regulatory thresholds are.”

WisdomTree is testing the SEC acceptance threshold for Bitcoin with the latest ETF application
WisdomTree is testing the SEC acceptance threshold for Bitcoin with the latest ETF application

“I was not surprised yesterday by the presentation of WisdomTree,” said Eric Ervin, President and CEO of Blockforce Capital, to Cointelegraph. “We requested a similar concept last year.” This request went to Reality Shares ETF Trust, a publicly traded fund that proposes to invest in a portfolio that includes both government bonds and bitcoin futures (up to 25% of total assets).. Reality Shares subsequently withdrew its application on the SEC’s recommendation. Ervin said to Cointelegraph:

“Bitcoin deserves a place in a diversified portfolio, and if the SEC continues to block this, it is essentially encouraging investors to pursue this engagement in other, possibly less regulated, ways.”

Wilshire Phoenix is ​​on the path of trust

Meanwhile, on June 12, the Wilshire Phoenix investment firm applied to the SEC – not an ETF – for a grantor trust that has a different application process. However, just like a cryptocurrency ETF, it allows a publicly traded Bitcoin fund that falls under the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC has already approved such a trust for grayscale investments.

James Angel, a professor at Georgetown University’s McDonough School of Business, told Cointelegraph that getting an SEC-approved trust is easier than getting an ETF approval “as long as everything is disclosed, all risk factors.” “” Wilshire Phoenix’s SEC-S-1 filing has “an entirely different set of permits” with another set of bureaucrats ruling. He added, “I don’t see that the SEC has legitimate means to reject it.”

Wilshire Phoenix had previously applied again for an ETF, a mix of Bitcoin and short-term government bonds that used the notes to dampen cryptocurrency volatility.. His application was officially rejected by the SEC because, according to the agency, the Bitcoin market was still heavily manipulated in February 2020.

Over-the-counter trading

This alternative path of trust has some disadvantages. The Bitcoin Grayscale Trust – and the Wilshire Phoenix Trust, if approved – are traded over-the-counter, not on major exchanges like the New York Stock Exchange. This means that it is not accessible to retail investors like most investors. Retailers do not have access to OTC markets “Lee Reiners, member of the conference and executive director of the Duke Law School’s Global Financial Markets Center, told Cointelegraph: “GBTC trades a fairly high premium for Bitcoin, which Bitcoin is unlikely to do would be an ETF.”

Wilshire Phoenix’s product has a premium of approximately 0.90% (i.e. 90 basis points) based on your request, while Grayscale has an administration fee of 2.00% (200 basis points).

Furthermore, An ETF appeals to a broader range of investors, retailers and institutions and, according to Reiners, would be more liquid than a grant fund like Grayscale or Wilshire and adds: “In addition, investors are more familiar with the structure of ETFs.”

“Some investors will not touch OTC yet, although trading over OTC is no longer as troublesome as it used to be,” Angel told Cointelegraph, noting that these people are likely to be waiting for listed products to appear.

Lennard Neo, Head of Research at Stack Funds, told Cointelegraph that there were significant differences between the Grayscale and Wilshire trusts, including the “credited” target market, Grayscale, the Wilshire retailer, and also the highest prize of grayscale stocks compared to the underlying and adds:

“However, the financial characteristics of a publicly traded fund are not significantly different from a publicly traded fund or product as such, the purpose of which is to provide access to the overall market.”

Neo went on to say that “demand has definitely been there and has been there for two years,” which is reflected in the influx of investors buying cryptocurrencies in zero-rate commercial apps like robinhood and on major exchanges. He said: “A publicly traded cryptocurrency fund would open the doors to the participation of more traditional retail investors who already have brokerage accounts with existing companies that do not do cryptocurrency transactions.”

Consultants prefer ETFs: survey

Elsewhere, A recent Bitwise Asset Management survey of hiring financial advisors on crypto assets found that advisors “predominantly” [65%] You’d rather buy crypto in an ETF package than any other option. “ as seen in the graphic below.

Preferred ways to invest in crypto

“There is no reason for the SEC to reject this.”

What are the chances that Wilshire will receive SEC approval for your trust? “I’m cautiously optimistic,” said Angel, adding, “I don’t see any reason for the SEC to refuse,” although he wouldn’t be surprised if the agency watched for a while. “Don’t hold your breath and wait for the SEC to act” is a useful maxim. SEC staff will consider such an application very carefully and will likely forward it to agency officers, which is not always the norm. There may be multiple submissions modified before a decision is made.

Are other rejected ETFs now also trusting? Most are likely to wait and see what happens to the Wilshire app, but if approved, others can try. However, the first approval of a SEC cryptocurrency ETF may not soon be possible. “We won’t see him during Jay Clayton’s supervision”Angel said. Bitcoin still has a somewhat dubious reputation among regulators, including the SEC president, whose term ends in 2021. Acree agreed that some regulators simply don’t like cryptocurrencies:

“There is an ongoing trend to separate infrastructure from the power of money, and this step poses a risk to regulators who consider non-government controlled asset classes to be increasingly conventional.”

As soon as Clayton leaves the SEC, you can expect to see a crypto ETF, said Reiners. “And if it happens, it will be a BIG event”He continued to share with Cointelegraph, adding, “Anyone with an ETrade or Robinhood account could get to know Bitcoin without having to touch Bitcoin. It would announce that cryptocurrencies are widespread in a way no other product could.” However, Neo does not believe that “ETF is the endgame here” while clarifying:

“An ETF will be an important gateway for investors entering digital assets. Traditional markets are formed equally when investors enter, conscientiously and ultimately more sophisticated, which leads to a demand for more complex structural products as they look for higher returns and opportunities. “

Overall, investment firms seem to have decided that a frontal attack by large cryptocurrency ETFs is not possible in the SEC anyway – not now – and are therefore looking for reduced alternatives. One is to reduce the ETF’s bitcoin component so much that the agency no longer sees it as risky.

Another option is to create a grantor trust that allows public trading in BTC, but only over the counter, which limits the risk. Overall, the strategy for dealing with the regulator seems to be to step in the door and wait for better times.