Chairman Gensler of the SEC piqued the interest in the US’s ETP community with his recent comments on what might finally become the acceptable product to break the country’s crypto ETP drought.
There have been over 20 submissions to create a crypto ETP in the US, and none has been approved as yet. However, Gensler’s recent comments helped give shape to what might be deemed acceptable by the regulatory body.
Ben Slavin, Global Head of ETFs, Asset Servicing, BNY Mellon, commenting on the ever-postponed approval of a crypto product, says: “This one has been very diffcult to predict which has only heightened the speculation of when the SEC might approve a product. Really the comments from Chairman Gensler put more rocket fuel in the concept or notion that the SEC would approve these products potentially in pretty short order.”
But, as Slavin points out, Gensler’s comments opened the door for a crypto ETP which is relatively narrow or specific in scope. “It is important to differentiate from what they are looking to approve against all the other products filed to date,” Slavin warns. The comments implied they would be happier with a product based on futures of bitcoin.
“That is different from most of the active filings,” Slavin says. “Most of them have been on physically backed bitcoin products, where the best parallel product is an ETP on gold or silver.”
Subsequent to the comments, there have been a few filings under the 1933 Act, which hold futures in the same way as commodity based ETPs, offering access to market products like oil or natural gas.
“Those products hold cash and buy the future, rolling that exposure on a continual basis to maintain the exposure to the asset,” Slavin explains. “More recently Chairman Gensler’s comments have indicated a willingness to potentially approve and review products that hold listed futures, specifically the CME-listed futures, and products under the 1940 Act, which is the regulatory scheme under which most mutual funds and ETFs operate.”
The result has been another outbreak of filings. Interestingly, ETF issuers VanEck and ProShares both immediately filed to launch Ethereum products, on the basis that the CME also lists futures on that currency. Those filings were withdrawn within 48 hours, giving a clear signal that the SEC was not ready to approve products listed on other currencies, and had politely but firmly told the firms that this was the case.
Slavin says: “The earliest we could see a product would be at the end of October – that would be the earliest possible check point assuming the regulators approve these products.”
There can be no doubt of the appetite for a digital asset ETP in the US, given how strongly they have been supported in Canada and across EMEA. Dave LaValle recently left Alerian to join what is arguably the world’s largest digital currency asset manager with USD25 billion, the Grayscale Bitcoin Trust as Global Head of ETFs as it waits to convert to an ETF.
Slavin says: “I think the appetite for ETFs that hold digital assets remains incredibly strong,” commenting that the strength of their appeal in other markets offers a relatively strong proof of concept.
“It’s unclear how much the SEC is relying on these other products in other markets but these products are doing what they intended to do.”
More generally, Slavin comments that ETFs are enjoying the best of times, having passed the all-time record for assets in the US and in Europe.
“We are seeing flow come in across the board and what is interesting is that we are seeing a reversion back to equities given where the markets are at. Fixed income was the lead last year as part of a record year and now it’s switched back to equities,” he says.
“What is pretty amazing is the breadth across the industry where you are seeing such a wide range of new issuers come to the market and positive flow up and down the league table with a particular uptick in actively managed ETFs and the adoption of those products in a record number of launches across the industry.
“We are breaking our own records on the BNY Mellon platform in terms of volume in terms of launches and assets as well. I would say that it is fair to say we are more than 25 plus years into the journey with ETFs and here we are in 2021 and the picture seems to be accelerating with record flows over last couple of years and the pace continues to pick up with adoption continuing to increase with retail and institutional investors using them in their portfolios.”