Brazilian asset manager Hashdex will be ready to convert its bitcoin futures ETF to a spot product, a company executive said, considering regulatory clarity around such a fund is coming.
It’s just a matter of time. New legislation or a court ruling are both possible options.
Bruno Sousa, head of Hashdex’s US business, told Blockwork his company’s product has an advantage over other competing products on the market when it comes to making the switch.
The Hashdex Bitcoin Futures ETF (DEFI), which the company launched with the help of fund issuer Teucrium in September 2022, was filed under the Securities Act of 1933 (‘33 Act). Other futures ETFs were filed under the Investment Company Act of 1940 (‘40 Act).
“The concept was that to hold bitcoin, the ‘33 Act structure is a proper structure,” Sousa said in an interview. “The ‘40 Act can only have securities; it can never hold bitcoin itself…so those ‘40 Act ETFs using bitcoin futures don’t have the structure to take on bitcoin directly at any point.”
The ’33 Act structure could well be easier to convert from holding BTC futures to bitcoins than a ’40 Act fund might be, should that conversion process be approved by the SEC, according to Lara Crigger, editor-in-chief at data firm VettaFi.
“That’s because ’40 Act funds have very strict rules around the diversification of holdings and making distributions; as a result, they can’t invest in ‘riskier’ assets, like commodities,” she told Blockworks in an email. “33 Act funds, however, can take the form of grantor trusts, which hold physical commodities … and commodities pools, which hold futures.”
Who could be first?
Sousa’s comments come as the prospect for spot bitcoin ETFs have once again gained prominence.
Grayscale Investments is enveloped in a case against the SEC after the regulator last year declined the proposed conversion of the firm’s flagship Bitcoin Trust (GBTC) into an ETF. GBTC shares are now offered through a private placement exempt from registration under the ‘33 Act. They’re initially only available to accredited investors as a result.
During oral arguments in the DC Circuit Court of Appeals earlier this month, judges grilled the SEC on why the regulator approved bitcoin futures exchange-traded products (ETPs) and not the GBTC conversion.
Industry watchers previously told Blockworks, however, that a favorable Grayscale ruling might not mean much, as the SEC might choose to deny GBTC’s conversion, and other spot bitcoin ETF applications, for a different reason.
Hashdex launched the world’s first crypto index ETF in February 2021 on the Bermuda Stock Exchange. Now, Sousa argued DEFI has the most “straightforward process” to gaining spot bitcoin ETF approval when the time comes.
“Our conversion is not really a conversion; it’s just a change in investment policy — a very simple procedure,” he said. “And we will re-file whenever there’s a new fact that can lead us to the idea that the SEC might position itself differently.”
The first bitcoin futures ETF in the US, the ProShares Bitcoin Strategy ETF (BITO), hit the market in October 2021. It was filed under the ‘40 Act structure.
Valkyrie Investments, which launched a bitcoin futures ETF also filed under the ‘40 Act in that month, gained approval for a ‘33 Act bitcoin futures ETF last year.
A Valkyrie spokesperson did not immediately return a request for comment on its plans for the product.
Sumit Roy, a senior analyst at ETF.com, said other issuers could just file for a separate spot bitcoin ETF rather than convert their existing futures-based funds.
“If and when the SEC finally allows a spot bitcoin ETF to come to market, I think — and I would hope — that several such funds would be approved at the same time, and that fund structure wouldn’t be a deciding factor,” he said.
Keep reading for more excerpts from Blockworks’ interview with Sousa.
Blockworks: Hashdex’s bitcoin futures ETF has less than $2 million assets under management, compared to BITO, for example, which has about $960 million. Why has DEFI had such little interest?
Sousa: Last year’s bear market was a challenging environment for crypto ETFs globally, but bitcoin is clearly on its path to recovery.
We are anticipating more demand from investors as the macro environment shifts and the global banking crisis shines a light on bitcoin’s benefits.
Blockworks: What needs to happen before a spot bitcoin ETF is approved?
Sousa: A lot of the background issue here has been the dispute between the SEC and the CFTC. We’re seeing the commissioner of the CFTC saying that ether is a commodity, and we’re seeing the SEC saying time and time again — and giving indications — that this is a security.
The parallel discussion … is once you have the federal legislation determining who regulates crypto exchanges — we believe that will be the CFTC — and the CFTC rolls out rules for crypto exchanges, then the argument for unregulated markets or market manipulation goes under.
After that, essentially the SEC would be in a position to approve.
Blockworks: When will that be?
Sousa: It depends…but it’s feasible that it can happen this year if the world doesn’t blow up with everything that’s happening, and the folks in DC, New York and other places don’t have to focus on saving the current financial system.
It will eventually come out. It’s closer and closer.
This interview was edited for clarity and brevity.
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