BlackRock’s (BLK) recent filing for a bitcoin exchange-traded fund with the U.S. Securities and Exchange Commission sparked renewed institutional interest in spot bitcoin ETFs. The development seems only to have increased divisive discussions on crypto-related financial instruments in the U.S.
But to have a more nuanced conversation on the implications of a spot bitcoin ETF for markets, you only need to look north to Canada, where these products have been approved and running successfully for the past two and a half years.
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While the “not-your-keys, not-your-crypto” crowd will invariably point to the drawbacks of getting portfolio exposure to bitcoin through an ETF – namely, the fact that investors don’t directly own the underlying asset – it’s important to zoom out and understand that the ETF structure does offer benefits to a broader range of investors that goes beyond crypto natives.
Here are a few observations based on the Canadian experience.
Some crypto investors will always distrust not directly controlling their coins. But the reality is that in Canada, strict regulatory oversight has forced fund providers to operate transparently and adhere to an operational framework that makes the potential for asset commingling, hacks and fraud extremely difficult. To date, investors who have bought units of Canadian spot bitcoin ETFs have never had their assets hacked or had their funds lost through malpractice or poor balance sheet management, which cannot be said for the millions of investors who trusted their assets with the likes of FTX, Celsius Network and BlockFi.
The SEC has continued to argue that a spot bitcoin ETF could be dangerous for investors while, at the same time, deciding to greenlight bitcoin futures ETFs and the direct buying and selling of digital assets on exchanges. But in Canada, it has been shown that spot ETFs have been very efficient at mimicking direct portfolio exposure to bitcoin without the added uncertainty and volatility of the futures markets and having to deal with the operational opacity of unregulated exchanges.
We can’t overstate the importance of accessibility when we talk about the potential for an asset to achieve mainstream acceptance. A 2021 study by the Bank of Canada stated that a rise in bitcoin investment in Canada seemed highly correlated with the advent of easy-to-use mobile exchanges. And based on the hundreds of millions of dollars that have flowed into the top three Canadian bitcoin ETFs, it’s reasonable to assume that the accessibility inherent in a bitcoin-backed financial asset fully integrated into the legacy financial system is appealing to investors.
