Former chairman of the US Commodity Futures Trading Commission (CFTC) and original architect of the US crypto derivatives market, Chris Giancarlo, gives BEST EXECUTION the exclusive inside track on what a spot Bitcoin could mean for institutional asset managers, the reason it’s taken so long to get approval – and why traders should get ready, because this could be the tipping point we’ve all been waiting for.
What’s the background to this (potentially) historic decision?
Over five years ago in December 2017, the Commodity Futures Trading Commission (CFTC) under my leadership approved Bitcoin futures. And three years later based upon those CFTC regulated Bitcoin futures, the Securities and Exchange Commission (SEC) approved an ETF on Bitcoin futures. Now, two years further, they’re about to make this decision on an ETF on the spot Bitcoin market. So there’s certainly precedent for the US market regulators to approve regulated markets for crypto, and that precedent was set five years ago.
I think the real disappointment for the SEC is that it’s taken them so long to get where their sister agency (the CFTC) was able to get five years ago. And I think a lot of the delay has been because the SEC has been essentialy brokering a deal between TradFi – mostly Wall Street firms – and the left wing of the Democratic Party that is generally hostile to digital finance.
A lot of the delay has been because the SEC has been brokering a deal between Wall Street and the left wing of the Democratic Party.
It’s not a well-kept secret that as part of Senator Elizabeth Warren agreeing to stand down as a candidate for the Democratic nomination for President four years ago, Biden gave her control over all the financial regulators, at least in terms of personnel leadership and key issues. So [SEC chairman] Gary Gensler has had to navigate this ETF approval carefully. He’s really been negotiating a behind-the-scenes deal between the crypto sceptics on the left side of his party and the traditional financial firms like BlackRock who recognise that intuitional and retail demand for crypto investment has not diminished but grown.
[Ed. note: Also notably not prominent in this negotiation have been the new entrants into the field, eg the Coinbases, who have been on the defensive in recent years due to the SEC’s aggressive litigation and enforcement against crypto players.]
Cynics might say that what’s happened here is really to delay the emergence of this asset class, in order to allow time for traditional financial players to get ready to dominate the action once it goes live.
What could the implications of a Bitcoin spot ETF be for crypto as an asset class?
I think this is going to be huge for this asset class. I would not be surprised if within a month, we see as much as US$5 billion in AUM funneled into the approved ETFs, with Blackrock definitely being one of the major players. Right now, there is no spot ETF so the volumes are zero. But I think very rapidly you will see asset managers and financial advisors allocating 1-3% of their portfolios to this asset class. It will be a real tipping point for Bitcoin, and the pressure will quickly build for an Ethereum spot ETF right off the back of that – just like when we at the CFTC greenlighted Bitcoin futures five years ago, and it immediately sparked demand for Ethereum futures, which came not long afterwards.
We are going to see a huge fee war happen now… they’re all going to be scrambling for investor dollars.
But we are also going to see a huge fee war happen now. One firm already reduced their fees to less than 1% just yesterday [before any ETFs were approved]. We’re also going to see a huge amount of advertising spend, because we could see 11-13 spot ETFs greenlighted all at once by the SEC (which is unlikely to approve just one firm ahead of the bunch and allow them to get the jump), meaning that they’re all going to be scrambling for investor dollars.
How will the institutional space benefit?
This first step is going to be very institutional, and I think that it’s going to generate a huge amount of demand. After that, we’ll see the US registered investment advisors and high net worth money and independent retail investors clamouring to get access to these products as well. But the first wave will be on the institutional side – and the impact will not just be limited to the US.
The first wave will be on the institutional side – and the impact will not just be limited to the US.
Yes, spot Bitcoin ETFs already exist in other markets (Germany, Canada) and in local currencies, but the US is the largest institutional and retail investment market in the world. Accessing that level of interest and that level of investor demand is what this is all about.
Where do you think we will be this time next year?
We will see 1-3% of institutional portfolios as well as high net worth portfolios allocated to this asset class. I think this is going to be a major turning point – not least because of the certainty principle. For the crypto maximalists out there, the big significance of this move by the SEC is that if they were ever fearful that the US government would attempt to ban Bitcoin, this should end that fear once and for all – and Bitcoin will become normalised as an investment product. We could see as much as US$50-100 billion ETF inflows in the first year. [Ed note: For comparison, the bond ETF market in 2023 was around US$1.9 trillion).
We could see as much as US$50-100 billion ETF inflows in the first year.
Is the industry prepared for trading spot crypto – and are we ready to have an effectively regulated institutional market for Bitcoin?
Regional differences are interesting here. In the EU, the regulators tend to write the regulations first and then have innovation conform to the regulation. But in the US, innovation often outpaces regulation, as it certainly has with the development of markets for spot trading of Bitcoin, which remains outside of the regulation jurisdiction of Washington
That being said, the trading infrastructure is already there. There are both interdealer brokers and other intermediaries operating in the space, and they’ve already developed all kinds of derivative products on those spot markets. We have a regulated futures market for Bitcoin and Ethereum overseen by the CFTC, and there’s five years-worth of trading activity and product development there, as well as a whole lot of OTC activity taking place.
I think ultimately, Congress will pass one or other of various pending bills giving the CFTC authority over the spot Bitcoin market. Once that happens, markets are going to have a full suite of tradable products: from futures to ETFs to spot, and the market will do what the market does, which is develop all kinds of trading strategies around those derivative products.
The most exciting news for traders is that there will be all types of arbitrage opportunities.
Why should traders care?
The most compelling news for traders is that there will be all types of arbitrage opportunities based upon that. There’s already fee arbitrage developing in the ETF space and hasn’t even gone live yet. There will be regulatory arbitrage, margin requirement arbitrage, geographical global price and fee arbitrage. And that’s going to create all kinds of new trading scenarios and trading opportunity.
I think we’re going to see a lot of trading activity around this, and from a trader perspective that’s paradise, right? From a trading point of view, I think these ETF approvals are going to mean game on.
From a trading point of view, these ETF approvals are going to mean game on.
What are the limitations of a Bitcoin ETF that traders might need to be aware of?
There is no getting away from the fact that Bitcoin is a limited market, with a finite supply. But that’s where derivatives come in. In a limited market, derivatives are often 100x the size of the underlying spot market, and there are many commodity markets that have limited trading volume in the underlying – gold and oil being two of the most famous. And yet we still see almost unlimited trading in these asset classes. As a former executive of a derivatives brokerage firm and former head of a derivatives market regulator, I’m certainly not overly concerned about limited supply impacting the development of a Bitcoin market on the derivatives side. It is not an uncommon aspect of many commodity derivatives markets.
For Bitcoin enthusiasts, the limited supply of Bitcoin is not a product flaw, it’s a product feature. You can’t debase the value of Bitcoin because you can’t inflate the volume of it or the amount available. Yes, there might be some concerns from an ETF perspective because when you have some type of commodity change in demand, the only possible result is price action – so if there is greater demand for spot, you have to fill spot Bitcoin in order to fill your ETF. That will have inevitable price consequence.
But I think many people are betting that the approval of these Bitcoin ETFs will have an upwards price impact on Bitcoin. In the short-term we may see the impact of ‘buy the rumour, sell the news’ and there could be a sell-off, because the price has been run up in the expectation of the SEC decision. However, although I’m always reluctant to predict markets, I think that if these ETFs successfully become part of institutional portfolio allocation, I can’t imagine anything other than a price increase in Bitcoin – above where it’s currently at now.
The Honourable J Christopher Giancarlo served as the 13th of the US Commodity Futures Trading Commission. Considered one of “the most influential individuals in financial regulation,” he also was a member of the US Financial Stability Oversight Committee, the President’s Working Group on Financial Markets, and the Executive Board of the International Organization of Securities Commissions.
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