The Future of Crypto ETFs
By Brett Tejpaul, Head of Institutional Sales, Trading and Prime, Coinbase
The launch of the first bitcoin futures exchange-traded fund (ETF) in October was a long-awaited milestone for the crypto industry, and its explosive growth shows the appetite investors have for digital asset funds.
For many in the crypto market, however, the Proshares Bitcoin Strategy ETF is seen as just a first step toward the bigger goal: Getting regulatory approval for an ETF that gets exposure to bitcoin itself, rather than just futures contracts. But regardless of whether a fund is getting its exposure to bitcoin futures or to the cryptocurrency itself, it’s critical to investors that the management team brings a wealth of crypto-native experience to what will be a first-generation product.
A bitcoin ETF will bring unique opportunities for investors, but will also present unique challenges on the investment management side.
Building an ETF Infrastructure
The backlog of applications seeking regulatory approval for a bitcoin spot ETF is a clear sign that the crypto industry is interested in more than just a fund tied to futures contracts. But what exactly would a bitcoin ETF look like?
In fact, the foundation and infrastructure for a bitcoin ETF is already in place. In 2013, Grayscale Investments, the largest digital currency asset manager in the world, launched Grayscale® Bitcoin Trust (Symbol: GBTC), becoming the first company to launch a publicly traded bitcoin fund in the U.S. It also remains the only firm to convert a bitcoin fund into an SEC-reporting company.
To be sure, Grayscale has always been fully committed to converting GBTC into an ETF when the regulators give the greenlight. And by already having a product in the marketplace with a well-recognized brand, a strong asset base, a liquidity profile, and a broader trading ecosystem there to support the liquidity of the product, Grayscale is uniquely positioned to launch a crypto ETF.
From its inception, the firm has been focused on building an infrastructure that can scale to meet its evolving needs - and the needs of its investors. With that in mind, Grayscale selected Coinbase Custody in 2019 to serve as its qualified custodian, seeking a custody provider that could offer robust security, insurance coverage, and regulatory compliance.
Just as important, Grayscale sought a custodian that could scale with its business, which means devising solutions around both its growing suite of products and its growing assets under management. Having a custodian operating at scale will also be vital with the planned conversion of GBTC to an ETF, especially since there are unique operational complexities when you custody digital assets.
Coinbase is one of the largest digital asset custodians with dedicated on-chain addresses secured by battle-tested cold storage. They offer the industry’s leading insurance policy and undergo regular financial and security audits by external firms. As disclosed in our second quarter 2021 shareholder letter, Coinbase Custody supports 142 assets across 15 different blockchains, with $92 billion in assets on platform (AOP).
In addition to its partnership with Coinbase Custody, BNY Mellon also reached an agreement with Grayscale to provide GBTC with accounting and administration services. And when GBTC is converted into an ETF, BNY Mellon is expected to provide transfer services and also services through its proprietary ETF Center, which offers technology specifically designed to support digital asset ETFs.
A Maturing Market
The historical evidence shows that getting regulatory approval for an ETF has always been a marathon and not a sprint.
When you consider the first ETF to gain approval in the U.S. back in 1993, it is what we would now consider to be one of the most plain, vanilla ETFs in the world - which is S&P exposure with a market-cap weighted index.
We then saw the expansion into international equities and the expansion into currencies, commodities, fixed income, and the various sub-sectors of fixed income. The same questions that are being asked right now about a bitcoin ETF were also asked about all those other asset classes or exposures that investors have been able to take advantage of with what is now a battled-tested ETF wrapper. And those questions largely and simply come down to investor protection.
When looking back at SPDRs — which was the first ETF that came to market in the U.S. back in 1993 — what made it so important was the fact that it was an institutional investment thesis in nature; but by putting it into an ETF wrapper, it offered all investors access to an institutional strategy. In other words, it was a strategy that could benefit everyone, from self-directed investors going through a brokerage all the way up to institutional investors, who are some of the most sophisticated investors in the world.
A crypto ETF will similarly provide opportunities across all levels of investors, further helping to democratize investing and finance. From the perspective of institutional investors, especially those who might be entering the crypto space for the first time, putting bitcoin in an ETF wrapper will give it a framework with credibility, providing investors with the confidence to invest in a vehicle with which they’re already familiar.
Grayscale remains focused on working with Coinbase Custody and BNY Mellon to ensure that the plumbing and foundation is in place for GBTC, so that the planned conversion process is as fluid and frictionless as possible. The goal is to not only deliver a high-quality bitcoin ETF to current investors, but to build a durable crypto ETF franchise that will serve the next generation of investors as well.