US-based bitcoin ETFs are encountering an unexpected challenge in the form of digital "gifts" that have accumulated in their cryptocurrency wallets, which they neither purchased nor can sell.
Analysis by blockchain analytics firm Arkham Intelligence and the Financial Times has revealed that these ETFs, including those managed by Ark Investment Management and Bitwise Asset Management, have received unwanted digital artworks and tokens.
These virtual assets, often featuring whimsical images like frogs vomiting rainbows, are complicating the management of these funds, according to the Times.
The peculiar issue arises from the nature of cryptocurrency transactions, which allow the attachment of additional tokens—referred to as "dust"—to bitcoin transactions. This "dust" can include anything from non-bitcoin tokens to digital artwork embedded within the transactions.
Notably, over $20,000 worth of non-bitcoin tokens have been tracked to wallets linked to BlackRock's bitcoin ETF. That crypto ETF benefited from more than 70 days straight of inflows since its launch three months ago, but that streak was snapped last Wednesday when investor dollars stopped coming in, according to CoinDesk.
ETF providers who receive unexpected digital gifts along with their bitcoin purchases can’t just unload the assets due to regulatory restrictions requiring approval from the SEC, which has yet to give its blessing on those transactions.
"These are just weird crypto artifacts that legacy SEC structures and legacy tax structures were not designed to accommodate," Joe Hall, an attorney with the Davis Polk law firm, told the Times.
Since the launch of US spot bitcoin ETFs in January, more than 500,000 bitcoins have made their way into those funds, exacerbating the "dust" issue. The creation of bitcoin NFTs, which embed text and images into bitcoin, has accelerated instances of bitcoin ETF providers unintentionally getting these digital gifts.
In response to the growing problem, Bitwise Asset Management disclosed the blockchain addresses of its digital wallets in late January. Coinbase, the custodian for many bitcoin ETFs including Bitwise's, emphasized the importance of keeping wallet addresses private to prevent such issues.
While crypto ETF firms might want to capitalize on the potential future value of the digital assets by selling them, doing so could compromise the ETFs' legal status and create tax filing complications for their investors.
As a measure to manage this challenge, BlackRock's bitcoin ETF has reportedly instituted a policy of segregating these unsolicited virtual assets into a separate wallet, which can potentially be left indefinitely or donated to charity. This approach aims to maintain the attractiveness of the ETF to investors by avoiding complex tax implications, a person familiar with the ETF’s strategy told the Times.
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