The SEC is pitching a shutout against Bitcoin-based ETFs, and not Fidelity's storied name could possibly be sufficient to overcome the obstacles.
With over 35 million customers, $21 billion in earnings and $3.8 trillion in discretionary controlled assets, Fidelity Investments is one of those largest investment management businesses in the entire world. It may need all its heft to break the losing streak of crypto-fund patrons who've gone up from the United States Securities and Exchange Commission.
This followed similar SEC filings this season from WisdomTree, CBOE/VanEck, NYDIG Asset Management, Valkyrie Digital Assets and SkyBridge Capital.
A Fidelity Bitcoin fund could be an event of some historic importance. Based on Nik Bhatia, author of this book Layered Cash: From Dollars and Gold to Bitcoin and Central Bank Digital Currencies and adjunct professor of finance and business economics at the University of Southern California, this could be bigger than Elon Musk buying $1.5 billion in Bitcoin (BTC) for Tesla's corporate treasury, more significant than PayPal enabling its users to buy, sell and hold cryptocurrency, and greater than Coinbase's forthcoming initial public offering.
"It would bring the final stamp of validity to Bitcoin," Bhatia told Cointelegraph, and it might happen relatively soon. "I imagine that [CEO] Abby Johnson and Fidelity have registered, knowing they will get accepted, and I think that it's probably significantly less than 12 months away."
Nigel Green, founder and CEO of deVere Group -- a different financial advisory firm -- told Cointelegraph, that if the SEC approves Fidelity's BTC plans, it might mean"another major step into the mainstream to get cryptocurrencies. It is going to also, necessarily, prompt institutional investors into the already burgeoning cryptoverse."
Not all are sure, though. "The Fidelity name is vital, but it might not be large enough to overcome the other challenges," Georges Ugeux, adjunct lecturer in law at Columbia University Law School, told Cointelegraph. One of those hindrances would be the crypto capital' lack of diversification, illiquidity and, at least in the short term, the fact that the agency still doesn't have a verified chairman.
Lennard Neo, head of research at Stack Funds -- a crypto index fund provider -- told Cointelegraph:"We have seen several ETFs being rejected by the SEC mentioning manipulation and market size as worries." Nonetheless, the cryptocurrency area has grown significantly over recent years and matured into an emerging new asset class. "If one keeps knocking on the door, it will gradually open."
There are reasons, however, why approval of Bitcoin ETFs are improbable in the immediate future, Michael Venuto, co-founder and chief investment officer of Toroso Investments, informed Cointelegraph. "The SEC function is buyer protection. Approving an ETF of Bitcoin might be regarded as an endorsement which may run counter to more powerful forces inside our government." More clarity is still needed"at the federal, financial, tax and other regulatory levels" until the agency will approve a BTC fund, he said.
Concentration and liquidity issues
Regulators are concerned about, among other things, concentration risk -- i.e., the chance of"amplified losses" since holdings are not sufficiently diversified -- a threat which may be particularly pronounced using a Bitcoin fund. In its S-1 filing, Fidelity itself confessed that:
"Contrary to other funds which can invest in diversified assets, the Trust's investment plan is concentrated in one asset inside one asset class. This immersion maximizes the level of the Trust's vulnerability to a variety of market risks connected with bitcoin and electronic assets."
With equity funds, the SEC does not want any single inventory to include more than 25 percent of an ETF's basket dimensions as measured by market capitalization, Ugeux told Cointelegraph. Bitcoin isn't an equity, of course -- it is more like a commodity, at least according to the Commodity Futures Trading Commission and current statements by senior SEC officials -- but a Fidelity BTC would appear to really extend the SEC's concentration rules.
Another possible concern is liquidity, added Ugeux. ETF patrons are supposed to be continuously purchasing and selling the fund's underlying assets -- to protect the sponsor so it is not holding a lot of itself -- but here again, a Bitcoin finance could be problematic because its underlying assets aren't (relatively) liquid securities.
The filing added:"Bitcoin is a brand new advantage with a rather limited trading history. Therefore, the markets for bitcoin may be less liquid and more volatile than other markets for more established products."
However, these problems could be surmountable. Additionally, when acceptance does come, he said that:
"We expect multiple companies to receive the go ahead since the [regulatory] concerns were with Bitcoin within an ETF than anything specific to an individual proposition. Firms with a proven ETF existence and broad supply would have the advantages over the others."
As noted, a few half dozen companies have filed with the U.S. SEC to get crypto ETFs this year. Could any of them conquer Fidelity into the punch, and if so, would they have anything close to the effects of a Fidelity ETF?
"I really don't believe Fidelity has an edge in getting approved," Venuto told Cointelegraph. "The only one with a slight benefit is VanEck since they were the very first of the present class to file for some 19b-4 rule shift" -- which made it simpler to record ETFs.
Felix Shipkevich, a lawyer specializing in cryptocurrency-related regulatory and legal issues in Shipkevich PLLC, advised Cointelegraph:"All the ETF Bitcoin applicants are game-changers" -- i.e., not simply Fidelity. Even with all the regulatory ambiguity in the cryptocurrency area,"I've yet to see an ETF application from anything less than a first-tier financial services company."
Even if approval is eventually given, it may not happen so fast. Hester Peirce, a commissioner at the SEC and occasionally called"Crypto Mom" for her service of cryptocurrencies, addressed the matter of ETFs at a recent speech, and"she didn't give the impression that you [i.e., acceptance ] would come through immediately," said Ugeux. Approval(s) may take additional time, too, because Gary Gensler still has not officially been confirmed as SEC chairman nearly two months after his nomination, he also added.
From Peirce's address, an individual might even conclude that the SEC had dug itself into a small hole since it had postponed BTC fund approval for so long. Not only has the SEC's"reluctance to allow traditional investment vehicles to hold Bitcoin or Bitcoin futures has contributed to investors looking more expensive, less suitable, or not as direct replacements," she said,"but it also has increased the stakes of almost any regulatory approval for a mainstream retail merchandise we could one day grant."
The waiting has"magnified the first-approved advantage" for almost any Bitcoin ETF, and if the bureau allow one today, investors may believe the SEC is giving its"boon" to that particular product -- which are the wrong inference to take, Peirce added.
Whatever the situation -- whether or not as part of a group, whether earlier or later --"an ETF established by one of their biggest mutual funds in the world certainly makes a statement," said Neo regarding the Fidelity filing.
He continued:"It emphasizes the maturity and approval in Bitcoin" and would bring more institutional investors to the cryptoverse but also retail investors"with a low-cost, flexible alternative to effectively diversify their portfolio to electronic assets."
The move by this investment giant to launch a Bitcoin ETF further underscores that cryptocurrency cynics are on the incorrect side of history"