Will bitcoin exchange-traded funds (ETFs) ever be accepted by regulators in the US or abroad? That's a question that's even more complex than would initially appear, say industry participants.
A better question might be: is it regulators, specifically, that need convincing? After all, the agencies tasked with enforcing existing laws heavily consider input from multiple parties, including banks, many of whom have yet to embrace the still-nascent digital currency.
That was the viewpoint put forward by Ryan Radloff, head of investor relations at XBT Provider, a Sweden-based issuer that's already succeeded in listing bitcoin exchange-traded notes on a public exchange.
"It's a bit of a chicken-and-egg problem between the banks and the regulators," Radloff said.
"You're not going to see many big banks jumping in until the regulators are comfortable."
On that point, even within the US, different regulators approach cryptocurrencies like bitcoin very differently. Bitcoin is a form of property to the IRS, a virtual currency to FinCEN and a vehicle for 'money transmission' in the eyes of various state regulators.
The SEC has not yet taken an official stance on bitcoin's classification, but in the meantime, it has rejected two applications for bitcoin-backed exchange-traded funds thus far (the Winklevoss Bitcoin ETF and the SolidX Bitcoin Trust).
The outlook at the moment overall does not look promising, said Chris Burniske, blockchain products lead at ARK Invest, an investment management company that offers ETFs centered around emerging technologies.
"That was a pretty stern, hard line they drew," Burniske said of the SEC’s most recent ETF rejection. "It's clear it's going to take more work to get the SEC to approve something like this."
"Based on the response so far, it doesn't look optimistic for a bitcoin product in the US anytime soon in terms of regulatory approval, but this may change."
However, exchange-traded funds aren't the only option for public investment.
Futures contracts, which are overseen by another US regulator, the Commodity Futures Trading Commission, could arrive first, Burniske said. And the CFTC already considers bitcoin a commodity.
What about abroad?
Regulation across the globe varies hugely, but is generally improving.
"The countries you expect to have the most innovative regulators in 'legacy finance' have the most conducive regulatory environment for innovation in new finance," Radloff explained.
"This would include Jersey, Switzerland, Malta, Gibraltar, Japan and Sweden. However in the last 18 months, there are a growing number of government bodies who have issued guidance around dealing in bitcoin, and this picture continues to become more clear," he continued, adding:
"Expect more to be added to the list, likely in waves, as the space matures."
Notably, there are exchange-traded bitcoin products in Europe, but they aren't ETFs, they are exchange-traded notes, which are similar to ETFs but carry different risks. However, European investors and regulators are more accustomed to ETNs, said Radloff.
The COINXBE & COINXBT ETNs are listed on the Nasdaq Nordic. Another ETN-style bitcoin product was recently delisted on the Gibraltar Stock Exchange.
Nick Cowan, managing director of the latter exchange, said he's expecting two similar bitcoin products to be listed soon, as well as a third based on a basket of several cryptocurrencies.
"We have a great regulator who took the responsibility for driving this process with external consultants," Cowan told CoinDesk.
But what about criticisms that the market is immature? Today, there are only a handful of data points to draw on to evaluate the claim.
The recent Global Cryptocurrency Benchmarking Study by the University of Cambridge's Centre for Alternative Finance found that only 46% of cryptocurrency exchanges surveyed had a government license.
Further, differences were found region to region. Eighty-five percent of exchanges based in Asia-Pacific did not have a license, whereas 78% of North American-based exchanges did.
This discrepancy is explained, in part, by the fact that China does not have formal regulations for the industry.
In addition, almost all of the exchanges that Cambridge researchers surveyed had their own compliance programs in place that fulfilled know-your-customer and anti-money laundering requirements, even if the exchanges did not have a formal license.
Garrick Hileman, economic historian at the University of Cambridge and London School of Economics, said bitcoin industry participants have made a lot of progress over the years in their compliance efforts.
"Self-regulation and internally driven compliance programs are a big part of the story," Hileman said, adding:
"Enhanced compliance by firms has accompanied the overall increasing maturity we are observing across the cryptocurrency industry."
First the rest, then the west?
It's clear US regulators want to see stability and transparency before they approve a product that could invite a flood of money into a market less than a decade old.
Still, industry observers also say the SEC’s comparison of the stability and transparency of bitcoin to equities stocks is apples to oranges, and that a more analogous comparison would be to commodities like gold and oil – the markets for which are often quite opaque (for example, OPEC decisions) and yet ETFs flourish.
Communicating issues like these to regulators will be of key importance.
In the meantime, the Winklevoss bitcoin ETF is appealing the SEC's rejection of its application, and there is also a cryptocurrency ETF application that has been made for an ether-based fund called the EtherIndex Ether Trust.
The SEC declined comment when asked if it would treat an ether-based application differently, but in its official notice of the fund's application, it recognized at least one major difference: "[U]nlike bitcoin, ether was not designed to function purely as a store of value."
In the end, an abundance of caution is good not only for investors, but for the cryptocurrencies as well, Ark Invest's Burniske said. This is because huge demand through ETFs could potentially strain the still-developing markets.
The first gold ETF bought $40m in gold each day over its first 30 days, but estimates have suggested an ETF could attract as much as $300m to the cryptocurrency market.
Given this potential boost, it's no wonder they remain a matter of interest for investors – and a potential prize for innovators.
Bitcoin and official image via Shutterstock