Hashdex Targets First US Bitcoin Spot Approval With Novel Presentation

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A little-known Brazilian asset manager has devised a novel solution that could allow it to take on much bigger rivals like BlackRock and Ark to win approval for the first US spot bitcoin exchange-traded fund.

The Hashdex move is intended to assuage Securities and Exchange Commission concerns about the risk of manipulation in the bitcoin spot market.

While rival applicants such as BlackRock propose to set up a “shared surveillance agreement” with cryptocurrency exchange Coinbase to detect any potential fraud, Hashdex says instead that its ETF’s NAV calculation would be derived from the bitcoin futures curve of the CME market.

The New York Stock Exchange filed an application with the SEC to allow Hashdex to convert its $3 million NYSE Arca traded Bitcoin Futures (DEFI) ETF into a spot Bitcoin Hashdex ETF.

The Hashdex request comes amid growing speculation that US regulators are about to end their decade-long resistance to the creation of spot bitcoin ETFs – which invest in the “physical” cryptocurrency, rather than of futures contracts – since BlackRock, the world’s largest asset manager, filed an application to launch such an ETF in June.

BlackRock’s move ushered in a 21st-century-style gold rush as big-name rival managers including Ark Investment Management, Fidelity, Invesco, WisdomTree, VanEck, Valkyrie Investments and Bitwise refiled their SEC applications in the hopes that BlackRock’s filing opened the regulator’s door.

The SEC is still reviewing the filings, leaving the industry to guess whether or not it will allow spot bitcoin ETFs, a structure it has opposed on the grounds that bitcoin is traded on unregulated exchanges that can be potentially susceptible to manipulation. or fraud. .

However, if the SEC is willing to relent, it would mean that all of these household names could still be displaced by Hashdex, a Brazilian cryptocurrency house that currently manages just $435 million in Latin America, Europe and the United States, less than 1/ The 20,000th part of BlackRock’s assets under management of 9.4 trillion dollars.

DEFI is currently by far the smallest of the four bitcoin futures ETFs traded in the US, a structure the SEC has allowed because futures contracts are listed and traded on the Chicago Mercantile Exchange, a regulated market. The SEC believes that this settlement provides sufficient oversight to prevent the risk of investors being harmed by criminal activity.

The Hashdex ETF would hold a mix of bitcoin futures contracts, spot bitcoin, and cash. You would buy and sell physical bitcoins through the CME Physical Transaction Exchange, a type of private agreement between two parties to trade a futures position for the underlying asset. These transactions are subject to market surveillance by the CME.

As such, “any attempt to manipulate the fund’s price would require influencing the futures curve in the CME market,” a market the SEC is happy to allow to support the prices of the existing quartet of bitcoin futures ETFs, according to the report. document.

Nate Geraci, president of The ETF Store, a financial adviser, described the Hashdex/NYSE proposal as a “brilliant move.”

A second factor of crucial importance to the filing is that DEFI is structured under the Securities Act of 1933, rather than the Investment Act of 1940 favored by many ETFs, including its rival bitcoin futures funds.

Regulated investment companies structured under the 1940 Act can only invest in securities, not commodities.

However, grantor trusts and commodity groups created under the 1933 Act are allowed to invest in commodities, so ETFs such as SPDR Gold Shares (GLD) are structured according to this format.

This is relevant because SEC Chairman Gary Gensler has stipulated that bitcoin is a commodity, not a security, although he believes that most other cryptocurrencies are securities.

If the SEC gives in on spot bitcoin ETFs, or is forced to reverse course if it loses an ongoing court case with Grayscale, which is suing the regulator for the right to convert its existing Grayscale Bitcoin Trust (GBTC) into a ETF, this could potentially give Hashdex an advantage due to its 1933 Act structure.

There is a view that it would be faster to convert an existing fund to start trading spot bitcoin than to launch a new vehicle from scratch.

“Should the SEC approve a spot bitcoin, DEFI can simply convert from futures to physical because its structure allows it to hold futures or physical assets, as is the case with most commodity ETFs,” said Cinthia Murphy, director ETF Think Research. Tank, the research arm of Tidal Financial Group.

“There are a couple of filings that need to be done for the Law of ’33 to become, but once passed, DEFI could become the next day after SEC approval,” he added.

This option would not be available for other existing bitcoin futures ETFs, such as the ProShares Bitcoin Strategy (BITO) ETF, Murphy said.

“[19]Law 40 funds cannot contain physical assets, only securities, so a conversion is not possible. We will likely see a number of Act 33 spot bitcoin funds hit the market, rather than conversions of existing funds due to these regulatory restrictions associated with Act 40 funds.”

Being the first can be beneficial. BITO, which outperformed rival VanEck products Valkyrie and Hashdex ETFs in the market when it launched in October 2021, currently owns $942 million of the segment’s $1.01 billion.

However, in this case investors may choose to wait for the launch of similar products from familiar names like BlackRock if they believe they will follow the launch soon after.