Canadian Bitcoin ETF turns up heat on U.S. fund managers, regulators

Canadian Bitcoin ETF turns up heat on U.S. fund managers, regulators
Being behind Canada on Bitcoin funds could put U.S. ETF providers at a disadvantage when it comes to gaining market share.
FEB 12, 2021

The decision by Canadian regulators to approve a Bitcoin ETF could represent a tipping point for U.S. money managers' efforts to get their own Bitcoin funds through the regulatory logjam, one analyst said.

Purpose Investments announced Friday morning that it has been cleared by Canadian securities regulators to launch Purpose Bitcoin ETF (BTCC), which is the first Bitcoin ETF in North America to gain regulatory approval, according to Bloomberg.

The new ETF is scheduled to start trading on the Toronto Stock Exchange next week and will be available to U.S. investors through brokerages that have access to the Canadian exchange.

There are a handful of other active filings awaiting regulatory approval in Canada, as well ETF filings before the Securities and Exchange Commission in the U.S. from VanEck and Bitwise Asset Management.

“Now that they’ve done it in Canada, it puts pressure on the SEC and money managers here because they don’t want to be behind,” said Chris Kuiper, vice president of equity research at CFRA.

“In the U.S., it’s still up to the SEC, and they want to see more transparency and to make sure that the market can’t be manipulated,” Kuiper said. “The market has to be big enough and liquid enough that you can’t have someone behind the scenes doing any hanky-panky to manipulate prices.”

Todd Rosenbluth, director of mutual fund and ETF research at CFRA, said a U.S. Bitcoin ETF has been under consideration by regulators since a 2013 filing.

“Since then, seven other firms have attempted their own, either to be rejected or withdrawn,” he said. “The SEC appears to have a very high bar to clear, tied to market manipulation and custody audit. As the infrastructure around Bitcoin grows, we expect an ETF to come to market eventually, but it is unclear when.”

The Purpose Bitcoin ETF is structured like the SPDR Gold Shares ETF (GLD), which holds physical gold in direct proportion to the shares in what is effectively an ETF trust.

In the case of the Purpose ETF, Kuiper said, “they will physically hold Bitcoin in cold storage offline where it is safe from hacking.”

“As people buy more shares of the ETF, they will have to buy the Bitcoin to back it,” he added.

The Purpose ETF operates as a true ETF and is distinct from the $8.5 billion Grayscale Bitcoin Trust (GBTC), which typically trades at large premiums to the fund’s net asset value.

As Kuiper explained, the Grayscale fund is often compared to traditional ETFs because it can be bought and sold on brokerage accounts, but the premium share price relative to the NAV is similar to a closed-end fund.

The reason shares of Grayscale trade at a premium has to do with the initial sale to accredited investors at cost, which are locked up for six months, and then sold on the secondary market to any investor. Thus, anyone buying GBTC through a brokerage account is buying from an accredited investor for a premium.

Kuiper said the Grayscale model could be in jeopardy if more ETFs like Purpose come to market that provide investors with direct access, minus the premium.

“As these products come to market, that premium for Grayscale will collapse,” he said.

Greg Taylor, chief investment officer at Purpose Investments, said the ETF was originally filed with Canadian regulators in 2017, put on hold in 2018, and then refiled last year.

Key to getting it through the regulatory process, he explained, was modeling it after gold ETFs that included a “solid custodian, backed by physical (Bitcoin), and had no futures overlay.”

“The big thing for regulators was getting comfortable with the counterparties, and we followed the road map of how gold ETFs were structured,” Taylor said.

Purpose Investments was founded in 2013 and manages more than $7.9 billion ($10 billion Canadian) across more than 50 ETFs.

Handicapping the race between mutual funds and ETFs

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