Hyland, who played a key role in developing the first commodity and oil ETFs in his role as CIO at United States Commodity Funds, hopes to introduce some of the first crypto ETFs. Last year, Bitwise opened a private cryptocurrency fund.
SEC Concerns Addressed
Hyland thinks the SEC’s concerns about a crypto ETF have largely been addressed. Bitwise has kept its private fund’s crypto assets in a regulated custodian, a service the five large ETF custodial companies are considering offering.
An ETF does not hold the coins, he said, but swaps or futures on the coins. An ETF holding swaps or futures could be custodized by an ETF custodian that manages futures based currency or commodity ETFs.
Another SEC concern is enhanced regulated trades. Some of the big ETF shops are establishing cryptocurrency trading desks, he noted, meaning a cryptocurrency ETF could transact on platforms with a regulatory status similar to what they already do with equities.
The SEC’s concern about how crypto ETFs will perform in real life can be addressed by what is happening in Europe, he said, where four crypto ETFs, with $600 million in AUM, have existed on regulated exchanges since 2015.
SEC Will Act Soon
Hyland thinks the SEC will approve a crypto ETF in 2019 if doesn’t do so in the next couple of months. He doesn’t see action near the midterm election. He pegs the chance for action in 2018 at 20%, in 2019 at 60% and after 2019 at 20%.
Asked about physical versus futures bitcoin ETFs, Hyland said that because between $6 billion and $7 billion in bitcoin is traded daily while only $40 million to $50 million is traded in bitcoin futures daily, physical makes more sense. With physical bitcoin, it is not necessary to buy futures or deal with all the fees.
Regulators, he acknowledges, will find it easier to approve of a product connected to futures since bitcoin futures, currently traded on Chicago-based exchanges CME and CBOE, are regulated in the US. While he envisions regulators allowing futures-based products, he nevertheless sees owning the underlying assets as a better long-term prospect.
Once the SEC approves the first crypto ETF, Hyland said more such products will come to market since there will be no grounds for not approving similar products. Those with similar products will be approved in a similar time frame.
Leveraged products could be different, he said, as the depth of the market becomes an issue and price volatility times leverage becomes even more of an issue.
Asked what types of crypto ETPs he will bring to the market, Hyland said he will offer diverse coin groupings by means of a passive index, similar to the company’s existing private fund. The company is currently examining products filed with the SEC and has found products that offer long and short positions, as opposed to his company’s point of distinction, a basket offering.
Hyland’s firm currently produces a market cap weighted index consisting of the top 10 cryptocurrencies. The company will provide additional indices based on attributes besides liquidity and size.
The company will also file for offerings outside the US, he said, noting that bitcoin ETPs exist in Europe. The first filing likely will be an index basket, but should the incremental cost be low for a single coin ETP, he might consider it.