In the latest installment of Ropes & Gray’s ETF podcast series, asset management partner Paulita Pike and counsel Ed Baer discuss recent developments related to cryptocurrencies ETFs and ETPs.
Ed Bear: hello. Thank you for joining us today on this Ropes & Gray podcast. I’m Ed Baer, an advisor to Ropes & Gray’s San Francisco office. Joining me today is Paulita Pike, a colleague of the Asset Management Practices Group and a managing partner of the Chicago office. Part of a series of podcasts on ETF issues, this podcast describes some of the recent developments related to cryptocurrencies ETFs and ETPs. First, I would like to say a few words. Paulita, could you explain what it means when talking about ETFs and ETPs?
Paulita Pike: Thank you, Ed. absolutely. Well, we generally use the term ETF when talking about traditional 1940 exchange-traded funds and talk about non-1940 funds that invest physical or “spot” crypto assets. When using ETP or listed products. The same is true for certain futures-based products. As we will discuss in more detail later, one of the key issues in determining whether a fund is an ETF or an ETP is that the fund invests. Broadly speaking, ETFs invest in securities (usually stocks and bonds), while ETPs invest in “physical” commodities such as gold, silver, futures contracts and currencies. With crypto assets, there is considerable confusion, or at least debate, about whether crypto assets are actually securities.
Ed Bear: That’s right, Paulita. The situation of crypto assets in the United States is very confusing. A few years ago, the director of the SEC’s corporate finance department at the time argued that Bitcoin and Ethereum, the two largest crypto assets in market value, were not securities. That’s still the general view, at least for Bitcoin and Ethereum, but to evaluate other crypto assets, the SEC is trying to determine if a crypto asset is an “investment contract”, an orange grove. Cryptocurrencies under federal securities law that rely on litigation decades ago, including interest in. And the more the SEC looks at crypto assets, the more they look like securities.
Paulita Pike: I fully agree, Ed. I don’t want to get stuck in the debate about whether various crypto assets are securities, so in the rest of the discussion it makes sense to deal with physical or “spot” Bitcoin and Ethereum (two cryptos). I think there are assets that various companies have tried to launch listed transaction type products as non-securities. The types of products that sponsors have failed to market in the US (Spot Bitcoin or Ethereum ETP) and crypto asset products that have been successfully marketed in the US (funds that invest in Bitcoin futures and contracts) are securities. Distinguishing between non-securities. Ed, given the role you played, do you think you can explain a little about the history of efforts to bring crypto assets products to market?
Ed Bear: thank you. In 2013, Winklebos twins filed an ETP registration statement to invest in Spot or Physical Bitcoin. This proposal included a type of structure called Granter Trust that holds Bitcoin. This structure attempted to duplicate the structure of gold or silver ETP. In this structure, the grantor’s trust holds the physical metal and investors can trade ETP shares on the exchange. The assumption behind this structural approach was that ETP could not be registered under the 1940 Act because Bitcoin was not security. The filing was winding through the SEC for several years. When I joined Ropes in 2016, I was hired to make the project a success through the SEC approval process. And it seemed that we were making progress. To list an ETP on an exchange such as NYSE or Cboe, you must have a valid registration statement on the ETP and the shares must be eligible to be listed under the exchange’s listing rules. The registration statement appeared to be making slow but meaningful progress in the SEC’s corporate finance department. However, because ETP’s exchange listing rules for holding Bitcoin or other crypto assets were unprecedented, the proposed listed exchange (Cboe BZX) changed its listing rules to the SEC’s trading market division and held it. I had to ask to allow ETP to do. Bitcoin. And there, the hurdles for launching Spot Bitcoin ETP were actually the focus.
Paulita Pike: That is correct. In 2017, SEC’s Trading and Markets staff rejected Cboe BZX’s request to change the list rules to allow Bitcoin ETP listings. Cboe appealed the decision to the entire committee, and in a unanimous decision in 2018, the committee confirmed Cboe’s disapproval of the proposed rule change. The Commission’s rationale has been repeated many times with the subsequent rejection of numerous rule change proposals-by the way, recently the SEC has rejected attempts to convert the Grayscale Bitcoin Trust to a listed ETP. When-The proposed listing exchange properly indicates that the rule is “designed to prevent fraudulent and manipulative acts and practices” and “protects the interests of investors and the public”. Could not show that it is. The question is whether the listed exchange has a “comprehensive oversight and sharing agreement with a fairly large regulated market related to the underlying or reference Bitcoin assets.” With Winklevoss and Grayscale’s denials, as well as many other SEC denials, the SEC has concluded that the global 24/7 nature of the Spot Bitcoin market cannot be fully monitored by listed exchanges. Grayscale and other sponsors claim that the existence of a monitoring and sharing agreement with CME listing Bitcoin futures contracts is sufficient, but the SEC agrees that it is sufficient for Spot Bitcoin ETP. Is not …
Ed Bear: exactly. And this is where things get interesting. Recently, the SEC has approved the listing of the Teucrium Bitcoin Futures ETP. Teucrium ETP invests only in Bitcoin futures contracts traded on CME. In approving Teucrium’s proposal, the SEC acknowledged that the CME Bitcoin futures market is a “regulated market of considerable size”, but only for CME Bitcoin futures contracts and is the underlying Bitcoin market. Not about. As a result, exchanges like NYSE Arca and CboeBZX have oversight and sharing agreements with fairly large regulated markets, but not with Bitcoin ETP’s assets.
Paulita Pike: So where does it leave things behind? We know that Canada, Australia and other countries have Bitcoin ETPs that seem to work fine. Will the SEC approve the Spot Bitcoin ETP?
Ed Bear: Now, at some point, the SEC’s hands could be forced. Immediately after NYSE Arca’s proposal was rejected, Grayscale requested the DC Circuit Court to consider dismissing the proposal by the SEC. Also, although the review request did not mention administrative procedures, Grayscale was previously allowed by the SEC to issue and list shares in the 1940 ETF investing in Bitcoin futures contracts. .. In addition, they point out that the pricing of CME Bitcoin futures contracts derives from the same group of US-based crypto exchanges used to evaluate Bitcoin holdings in the Grayscale Bitcoin Trust. ..
Paulita Pike: It provides us with a great opportunity to discuss Bitcoin futures ETFs. These ETFs purchase Bitcoin futures contracts to gain exposure to the price of Bitcoin futures. Since most of the ETF’s assets are US Treasury bills, they are considered ETFs under the 1940 Act and do not require SEC approval to be listed on the exchange. The first Bitcoin futures ETF was launched in October 2021 and quickly raised over $ 1 billion in assets. Then some others are listed. These ETFs offer different exposures than the proposed Bitcoin ETP because they seek to track the returns of Bitcoin futures contracts rather than Bitcoin itself, but are the only exchange-traded products that pass the SEC Master. is.
Ed Bear: That is correct. And nothing could change in the short term until the SEC changes its view on Spot Bitcoin ETP, the underlying Spot Bitcoin market is more regulated, or Grayscale or others successfully sue the SEC. There is sex. I’ve heard that there are some US-based cryptocurrency exchanges that are considering registering with the SEC as an exchange or an alternative trading system. As a result, one or more US cryptocurrency exchanges can become a significant regulated market for Spot Bitcoin. However, the global nature of Bitcoin transactions, which take place on non-US exchanges where the majority of Bitcoin transactions are unregulated, may not be the decisive factor in the regulation of US cryptocurrency exchanges. Suggests. And the proceedings against the SEC, even if successful, will probably take years. The greatest hope of breaking the deadlock could be a change in the composition of the committee, or at least the chairman of the committee, which is unlikely without a change in government.
Paulita Pike: Well, it brings us to the end of the podcast. Ed and I would like to thank everyone who participated in this discussion of cryptocurrencies ETFs and ETPs. For more information on the topics we have discussed and other topics of interest to asset managers and ETF sponsors, please visit: lopesgray.com, There are links to some additional material on these topics. We will publish several additional podcasts designed to provide a more detailed analysis of important and timely ETF issues so that we can better understand the current ETF situation.