Optimism for approval of first Bitcoin ETF hits fever pitch in industry

OPTIMISM is sky-high in the US$6.7 trillion exchange-traded fund (ETF) industry that after nearly a decade, the first US Bitcoin fund could begin trading next week.

The Securities and Exchange Commission (SEC) is poised to allow the first US Bitcoin futures exchange-traded fund to begin trading in a watershed moment for the cryptocurrency industry, according to people familiar with the matter.

The regulator isn't likely to block the products from starting to trade next week, said the people, who asked not to be named while discussing the decision.

Unlike Bitcoin ETF applications that the regulator has previously rejected, the proposals by ProShares and Invesco are based on futures contracts and were filed under mutual fund rules that SEC chairman Gary Gensler has said provide "significant investor protections". A spokesperson for the SEC declined to comment, as did an official at ProShares.

In the past week, crypto lender BlockFi and Cathie Wood's Ark Investment Management have put their names on applications for futures-backed Bitcoin ETFs, a structure that SEC's Gensler has hinted that he'd be open to. Meanwhile, Valkyrie Investments updated its futures-backed ETF prospectus with the ticker BTF on Wednesday - typically a sign that an issuer is nearing launch, according to Bloomberg Intelligence's Eric Balchunas.

The drama centres on Proshares, given that the SEC's deadline to reject or approve the issuer's futures-based filing under the Investment Company Act of 1940 - a route that offers higher investor protection - expires on Monday.

While the ETF industry has watched the SEC demur on countless applications since the Gemini Trust's Cameron and Tyler Winklevoss filed the first in 2013, Gensler's own words suggest this time is different, Balchunas said. The SEC head signalled that he'd favour funds based on CME-traded Bitcoin futures in August - a stance that he reiterated late last month.

"At the end of the day, really the strongest piece of evidence is Gensler's own words. He literally told them what to do," Balchunas said. "They can feel what's going on."

Should US regulators give the greenlight, four futures-backed Bitcoin ETFs could begin trading on US exchanges this month, with deadlines for applications from Invesco, VanEck and Valkyrie approaching. Meanwhile, dozens of cryptocurrency exchange-traded products have launched in Canada and across Europe.

Building speculation around a potential US launch has fuelled a torrent rebound in Bitcoin, with the world's largest cryptocurrency breaking above US$58,000 this week for the first time since May.

Bitcoin has surged by over 90 per cent since breaking below US$30,000 in late July.

Of course, it's far from certain that the current round of speculation is anything more than wishful thinking. There's roughly a 25 per cent chance that the SEC rejects or delays a decision next week, Balchunas said. And while issuers are clearly hopeful, there's no way to know what regulators are thinking, according to Morningstar.

"Issuers are desperately trying to do everything that they can to be the first, or among the first, out of the gate. This is a good old-fashioned asset grab," said Ben Johnson, director of global ETF research at Morningstar. "The only thing I think we can say for sure is that they're an indication of where these issuers think the SEC might be leaning."

Meanwhile, Morgan Stanley chief executive officer James Gorman is staying respectful of cryptocurrencies. "I don't think crypto is a fad. I don't think it's going to go away," he said on the bank's third-quarter earnings call with analysts on Thursday morning.

"I don't know what the value of Bitcoin should or shouldn't be. But these things aren't going away, and the blockchain technology supporting it is obviously very real and powerful."

That sets him up as a foil to rival Jamie Dimon, who runs JPMorgan Chase & Co. "I personally think that Bitcoin is worthless," Dimon said this week at the Institute of International Finance annual membership meeting. He added that clients are "adults" and that the firm can give them "clean as possible access".

Citigroup boss Jane Fraser struck a similar note this week: "We're fairly cautious around crypto as a bank. We proceed with great caution on that one as to where the value is and isn't," she said. "I am frankly much more excited about the technologies behind crypto than some of the products themselves."

In September, Morgan Stanley said Sheena Shah will lead a new team researching cryptocurrencies. On the earnings call, Gorman added that the firm isn't directly trading crypto for retail clients, instead giving them access to buy crypto through various funds. "For us, honestly, it's just not a huge part of the business demand from our clients. And that may evolve and we'll evolve with it," he said. "We're watchful of it, we're respectful, and we'll wait and see how the regulators handle it." BLOOMBERG