Hashdex aims for first US spot bitcoin approval with novel filing

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A little-known Brazilian asset manager has come up with a novel solution that could eclipse larger rivals such as BlackRock and Ark to win approval for the first spot bitcoin exchange-traded fund in the United States.

hash index move Attempts to assuage the SEC’s concerns about the risk of manipulation in the spot bitcoin market.

While rivals such as BlackRock have proposed a “monitoring sharing agreement” with cryptocurrency exchange Coinbase to detect any potential fraud, Hashdex has said its ETF NAV calculations will come from the bitcoin futures curve on the CME market.

The New York Stock Exchange has filed with the SEC to allow Hashdex to convert its existing $3 million Bitcoin futures ETF (DEFI) to spot Hashdex Bitcoin ETF.

Hashdex’s application comes amid growing speculation that U.S. regulators are ending a decade-long resistance to creating a spot bitcoin ETF since the filing by the world’s largest asset manager, BlackRock. ETFs invest in “physical” cryptocurrencies, not futures contracts. Applications for such ETFs were launched in June.

BlackRock’s move sparked a 21st-century-style gold rush, with big-name rivals including Ark Investment Management, Fidelity, Invesco, WisdomTree, VanEck, Valkyrie Investments and Bitwise The manager resubmitted its application to the SEC in the hope that BlackRock’s application will open the door to the market. Regulator’s door.

The SEC is still reviewing the documents, leaving the industry to speculate whether it would allow any spot bitcoin ETFs, but it opposes the structure on the grounds that bitcoin trades on unregulated exchanges and could be vulnerable to manipulation or fraud. .

However, if the SEC is willing to back down, it would mean that all of these household names could be replaced by Hashdex, a Brazilian cryptocurrency firm that currently manages $435 million in assets across Latin America, Europe, and the U.S., less than 1/2. BlackRock’s 20,000th asset under management is $9.4 trillion.

DEFI is currently the smallest of the four U.S. bitcoin futures ETFs, a structure allowed by the SEC because the futures contracts are listed and traded on the regulated market, the Chicago Mercantile Exchange. The SEC believes that this arrangement provides sufficient oversight to protect investors from the risk of being harmed by criminal activity.

The Hashdex ETF will hold a mix of bitcoin futures contracts, spot bitcoin and cash. It will buy and sell physical bitcoin through CME’s Physical Exchange, a private agreement between two parties to trade futures positions on the underlying asset. These transactions are subject to market surveillance by CME Group.

As a result, “any attempt to manipulate the fund’s price would require affecting the futures curve in the CME market,” the filing says, a market the SEC is happy to allow to underpin the pricing of the four existing bitcoin futures ETFs.

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

A second factor that is crucial to the application is that the 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 fund.

Regulated investment companies formed under the 1940 Act are only allowed to invest in securities and not in commodities.

However, grantor trusts and commodity pools created under the 1933 Act allow investment in commodities, so ETFs such as SPDR Gold Shares (GLD) are constructed in this format.

This is relevant because SEC Chairman Gary Gensler has ruled that Bitcoin is a commodity, not a security — even though he thinks most other cryptocurrencies are securities.

If the SEC does soften on the spot bitcoin ETF, or if it is forced to change tack if it loses an ongoing lawsuit with Grayscale, the firm is suing the regulator to delist its existing Grayscale ETF. Right to Convert Bitcoin Trust (GBTC) to ETF – This may give Hashdex an advantage due to its 1933 Act structure.

There is an argument that switching existing funds to spot bitcoin trading is faster than launching a new instrument from scratch.

“If the SEC approves spot bitcoin, DEFI could simply switch from futures to real assets because its structure allows it to hold futures or real assets — just like most commodity ETFs,” said Cinthia Murphy, director of research at ETF Think. , the research arm of Tidal Financial Group.

“Bill 33 requires several filings to convert, but once approved, DEFI can convert to spot the day after SEC approval,” she added.

This option is not available for other existing Bitcoin futures ETFs such as the ProShares Bitcoin Strategy ETF (small), Murphy said.

“(19)Act 40 funds cannot hold physical assets, only securities, so switching is not possible. We may see a series of ‘Act 33’ spot bitcoin funds enter the market, rather than due to the ‘Act 40’ ‘Switching existing funds due to regulatory restrictions associated with the fund.”

Being first may prove beneficial. BITO beat out rival offerings from VanEck, Valkyrie and Hashdex ETFs when it launched in October 2021, and currently holds $942 million of the $1.01 billion in the space.

In this case, however, investors may choose to wait for a similar product launch if they believe a household name such as BlackRock will follow soon.