Investment Firms Seek SEC Approval for Futures ETFs: Why the Hype?

In a noteworthy stride for the digital asset sector, two prominent investment entities have submitted applications to the U.S. Securities and Exchange Commission (SEC) with the aim of establishing exchange-traded funds (ETFs). ARK Invest and 21Shares, a crypto asset management firm, announced their collaborative endeavor. Their partnership is directed towards launching the ARK 21Shares Ethereum Trust and the ARK 21Shares Bitcoin Trust. These ETFs would track the performance of Ethereum and Bitcoin futures contracts, marking another significant advancement for the cryptocurrency field.

Managing Volatility: ETFs Leveraging Ethereum and Bitcoin Futures Contracts

The proposed ETFs aim to mitigate the risks associated with the storage and security of highly volatile cryptocurrencies. Instead, they intend to offer investors exposure to the oscillations in price observed in Ethereum and Bitcoin futures contracts, traded on regulated exchanges. The ETFs also aim to narrow the gap between the share price and the Net Asset Value (NAV) of their holdings.

For years, applications for Bitcoin ETFs have lingered in waiting, as the SEC has now shifted its focus to scrutinize these applications. The regulator's previous reluctance was primarily driven by concerns regarding market manipulation, custody intricacies, liquidity deficiencies, and inadequate investor protection. In contrast, ETFs linked to futures contracts might find a more favorable reception from the SEC. This is due to futures being overseen by the Commodity Futures Trading Commission (CFTC) and being traded on well-established platforms such as the Chicago Mercantile Exchange (CME).

Both ARK Invest and 21Shares have garnered the support of several prominent firms, as evidenced by their respective submissions to the SEC. Coinbase Custody Trust Company is poised to serve as the sub-custodian, while Bank of New York Mellon is designated to fulfill roles as the trusts' custodian, transfer agent, and administrator. Jane Street Capital will step in as the authorized participant and market maker, with the Cboe BZX Exchange being the designated listing platform.

Collectively, their aspiration is to navigate the regulatory hurdles that have impeded the SEC from approving cryptocurrency ETFs to date. The employment of futures contracts, instead of direct cryptocurrency holdings, aims to address concerns raised by the SEC about custody, market manipulation, and liquidity. Furthermore, collaboration with Cboe, an established exchange proficient in Bitcoin futures product listing, is envisioned to imbue the ETFs with a robust market infrastructure and monitoring mechanisms.

Both ARK Invest and 21Shares possess established track records of success in the cryptocurrency sector. ARK Invest is renowned for actively managed ETFs targeting disruptive domains such as artificial intelligence (AI), biotechnology (biotech), and blockchain technology. It has demonstrated staunch support for Bitcoin and holds a substantial stake in Coinbase. With an asset pool exceeding $1.5 billion spanning across 14 products, 21Shares (formerly Amun) is a trailblazer in issuing crypto ETPs within Europe.

Potential Industry Transformation

Pending SEC approval, the ARK 21Shares Ethereum Trust and ARK 21Shares Bitcoin Trust could emerge as among the pioneer cryptocurrency ETFs in the United States. This move could provide both institutional and retail investors a fresh avenue to participate in the surging growth of the sector. These ETFs would enter the arena alongside counterparts with analogous functionalities available in other global markets. Factors like fees, liquidity, tracking precision, and regulatory adherence will all significantly influence the performance of these proposed ETFs.

The partnership of ARK Invest and 21Shares arrives as demand for cryptocurrency exposure escalates among retail and institutional investors. An ETF dedicated to cryptocurrencies could offer investors a means of tapping into the cryptocurrency market without grappling with the intricacies and security concerns of holding Bitcoin directly. Such an ETF could potentially enhance the legitimacy of cryptocurrencies as a recognized asset class.

Through their synergistic fusion within the cryptocurrency landscape, ARK Invest and 21Shares have forged a strategic alliance. ARK Invest's distinction as a significant institutional investor in Coinbase, Grayscale Bitcoin Trust, and other cryptocurrency-related enterprises aligns with their optimistic outlook on transformative technologies. With over 14 products under management and assets exceeding $1.5 billion, 21Shares stands as a vanguard in issuing crypto ETPs across the European market.

While numerous applicants have submitted proposals, the SEC in the United States has yet to greenlight a crypto ETF. Persistent concerns regarding investor safety and market stability have led to frequent deferrals of decisions on multiple proposals. The genesis of this phenomenon can be traced back to the interest expressed by BlackRock, the world's largest asset manager with assets under management (AUM) exceeding $8 trillion. In the past, the CEO of BlackRock, Larry Fink, had referred to Bitcoin as "an index for money laundering," which is why the sudden shift in their stance has prompted several other institutions to reapply for a Bitcoin ETF. The competition began in July when the SEC formally accepted BlackRock's application, and then WisdomTree, VanEck, Fidelity/Wise Origin, Invesco Galaxy, and Bitwise decided to follow their footsteps.