ST Explains: Why the industry is excited about the US approval for Bitcoin ETFs

SINGAPORE - In a decision touted as a game changer for the cryptocurrency space, American regulators have finally given the green light for retail investors to trade easily in Bitcoin without actually holding any of it. The United States Securities and Exchange Commission (SEC) voted on Jan 10 to allow the first US exchange-traded funds (ETFs) that hold Bitcoin to be sold to the public. All 11 applications filed by asset managers including BlackRock, Fidelity Investments, ARK Investment Management, Invesco, WisdomTree, Bitwise Asset Management, Valkyrie and Grayscale Investments have been approved for listing. The new funds, known as spot Bitcoin ETFs, are expected to begin trading on Jan 11. Until now, mainstream investors who wanted to buy and sell digital currencies have had to either trade on crypto exchanges and pay high transaction fees or buy products that track Bitcoin in less direct ways. Now, the public can trade in the ETFs that track Bitcoin prices as easily as they buy stocks and mutual funds. The SEC approval comes more than a decade since asset managers applied for Bitcoin ETFs in 2013. These applications were rejected on the grounds that the ETFs would be vulnerable to market manipulation, but a US court found in August that the SEC was wrong to reject crypto asset manager Grayscale Investments’ Bitcoin ETF application, prompting the agency to review its position. Mr Gerald Goh, co-founder and chief executive of crypto bank Sygnum Singapore, said the SEC approvals have a more nuanced impact on the industry beyond driving up Bitcoin prices. He said the approvals enhance the legitimacy of Bitcoin, and could lead to a broader acceptance of cryptocurrencies by institutional market participants and their eventual mainstream adoption. Mr Lasanka Perera, chief executive of exchange Independent Reserve Singapore, said the approvals mean that some of the largest global wealth management firms with the largest marketing and sales budgets will compete to sell Bitcoin in order to win assets under management. This will supercharge the demand side for Bitcoin and make it an investible, accessible asset class to even the most traditional institutions, he noted. Mr Perera added that he thinks “the market’s next focus is sure to be an ETH (Ether) US spot ETF application”. Mr Hassan Ahmed, country director for Singapore at exchange Coinbase, said the approvals will ease restrictions on large money managers and institutions to buy and hold Bitcoin, which will improve liquidity and price for all market participants. Mr Lim Wee Kian, chief executive of DBS Digital Exchange, said an ETF is just one piece of the puzzle in achieving widespread institutional adoption, adding that a proliferation of institutional-grade platforms is another. They will be listed on Nasdaq, the New York Stock Exchange and the Chicago Board Options Exchange. The ETFs’ assets will comprise physical Bitcoin purchased from crypto exchanges and held via custodians like Coinbase Global. They will track a Bitcoin benchmark or index like in traditional finance. Issuers, now fighting for market share, plan to charge fees ranging from 0.2 per cent to 0.8 per cent, well below the broader ETF market average. A spot Bitcoin ETF allows investors to gain exposure to the price of Bitcoin without the complications and risks of owning the digital currency directly. Those who trade in crypto need to set up crypto wallets and accounts with crypto exchanges, but some have poor cybersecurity records, are prone to hacks, or found to have breached US anti-money laundering laws. ETFs, on the other hand, are listed on stock exchanges that have to adhere to strict rules. This also means retail investors can access the ETFs through their existing brokerage accounts, which are also closely monitored. The ETF structure also opens access to some institutional investors who are not allowed to invest directly in alternative assets. Ms Angela Ang, senior policy adviser for blockchain analysis firm TRM Labs, said that given the Monetary Authority of Singapore’s vocal stance against speculative retail trading in crypto, people can expect the regulator to exercise caution when looking at crypto ETFs. “Its concerns are long-standing and stem from a broad range of considerations. It has also introduced much more stringent guardrails around retail participation than the US. We’ll have to wait and see whether this will change with the SEC approval,” she added. Mr Goh said the landmark decision by the SEC could inspire a mindset change among investors, and he expects global regulators to be taking SEC’s cue to review their regulatory treatment of ETFs and other investment structures that provide investors access to crypto. Mr Ahmed said the SEC decision will be closely monitored globally. He said places like Hong Kong have already indicated they are amenable to spot Bitcoin ETFs available to retail investors. While Mr Perera thinks it is too early to tell, he said Singapore’s proposed new Bill to enhance the regulatory authority over financial services, including Bitcoin futures, makes provisions for possible spot-Bitcoin ETFs in Singapore.