Why recent developments in Canada suggest a bitcoin ETF is coming soon to the U.S. 

The road to a bitcoin exchange-traded fund (ETF) in the U.S. has been long, and it’s still not clear when the destination will be reached.

But recent developments north of the border suggest that the end is finally near. 

On Feb. 11, regulators in Canada gave the nod to the continent's first bitcoin ETF.  The Ontario Securities Commission (OSC) approved the Purpose Bitcoin ETF to trade on the Toronto Stock Exchange (TSX). Within days of the first approval, it greenlit a second, and then a third.

Like in the U.S., Canadian regulators have for years been reluctant to approve a bitcoin ETF.

Now, ETF watchers in the U.S. are more confident than ever that approval from the Securities Exchange Commission (SEC) will shortly follow. Fueling that perception, perhaps, is the fact that officials at the SEC are already on the clock with a recent filing from Cboe and VanEck.

Blame Canada

Gemini’s Cameron and Tyler Winklevoss first proposed a bitcoin ETF in the U.S. in 2013. After four years, the SEC rejected the Winklevoss ETF in March 2017. The attached exchange, Bars BZX Exchange, could not sufficiently prevent market manipulation, according to the SEC. The SEC argued that the exchange needed to have surveillance-sharing agreements with significant regulated markets to trade bitcoin.

Since that first attempt, there have been roughly 30 more proposals, with about a third of them receiving outright rejections from the U.S. securities regulator. Others chose to withdraw their applications before the SEC could hand down expected rejections. The most common reason that US regulators have given for rejecting these proposals has been a lack of qualified custodians, a lack of volume in bitcoin derivatives markets and the inability to sufficiently prevent market manipulation. 

In Canada, meanwhile, the dialogues around crypto and exchange-traded products (ETP) have centered on similar issues. Ultimately, it took three years and an appeal process for an ETP to start trading. 

Regulators in both countries often cited market manipulation as a reason for not allowing bitcoin ETFs. Since different venues can have radically different prices, agency officials expressed concern that an ETF could be subject to manipulation. 

“It's been an uphill battle to win over the regulators,” said Elliot Johnson, CIO at Evolve, which in mid-February became the second issuer in Canada to obtain approval for a bitcoin ETF. The firm has been in discussions with regulators since it filed for the first time in 2017, according to Johnson.

Four years ago, Evolve was hoping that the approval of bitcoin futures trading on Cboe and CME would push regulators toward approval. That didn’t happen.

Over time, however, the firm was able to assuage each of the regulators’ concerns, Johnson told The Block. To address price manipulation fears, Evolve uses the CME CF Bitcoin Settlement Rate, a once-a-day benchmark index for bitcoin that arrives at a price based on aggregated trade flow at spot exchanges around the world.

Then, the approval last year of a bitcoin closed-end fund from 3iQ changed the game, Johnson said. Closed-end funds are a type of ETP which, like ETFs, allow investors to purchase shares and realize gains or losses based on the price of the underlying asset, in this case bitcoin. At the time, 3iQ said it spent more than three years in dialogue with the OSC before its approval.

Because the closed-end fund was what Canadian regulators call a “novel product” it went through a longer process. 3iQ even had to appeal the initial decision of the OSC director. But once it received approval, most of the questions that would also apply to a bitcoin ETF had been answered, Johnson said.

Eric Balchunas, a senior ETF analyst for Bloomberg, told The Block that he thinks the Canada approvals mean this is the year there will be a U.S. approval. He says his hypothesis is based on, among other factors, a historical trend: Canada tends to approve novel products in the ETF space first, and the U.S. often follows.

Besides a bitcoin ETF, examples Balchunas cites are fixed-income ETFs and a China A-shares ETF. In fact, Canada was also the first to approve the kind of product that most consider an ETF when it greenlighted the Toronto 35 Index Participation Fund in 1990. Three years later, the U.S. approved State Street’s first offering. 

There are currently four bitcoin ETF applications pending review by the SEC. The furthest along is from VanEck, which filed its third attempt in December of last year. Cboe filed earlier this month to list and trade shares of VanEck’s proposed offering. 

The VanEck/Cboe offering was published to the Federal Register on March 1, starting a 45-day countdown to an SEC response. The SEC has an option to extend a final determination date. But however long the process takes, regulators will have to approve or reject the proposal by the end of this year. 

Tipping the scale

Laura Morrison, global head of listings for Cboe, said a Canadian approval could shift sentiment in the U.S. in important ways. The historical precedent that Balchunas identified — how the U.S. tends to follow Canada — is well-established, according to Morrison. 

Cboe is still trying to address lingering regulatory concerns in the U.S. pertaining to market manipulation. Pricing for the fund’s net asset value, the total value of the assets in the fund updated at regular intervals, is more comprehensive than ever, according to Morrison.

“The more participants that are publishing into this, the better we feel,” Morrison said. “And those participants are more regulated than they ever were before. The list is strong, and having that diverse input is really important.”

SEC commissioner Hester Peirce, outspoken in her criticism of the agency’s rigid stance against bitcoin ETFs so far, told The Block that the Canadian ETFs could make a difference in the eyes of her more skeptical colleagues.

“I think it's more just that it could give us experience with seeing how it actually works in practice, which is helpful for us and probably helpful for people who come in trying to make the case that one of these things could work,” she said in an interview. “They can point to one that actually is working in our neighbor market."

Besides Canada’s new bitcoin ETFs, other recent developments may also be shifting the political sentiment toward bitcoin and bitcoin ETFs, said Balchunas. Most prominently, well-known companies like Tesla are buying bitcoin and Gary Gensler, a former federal regulator with a sophisticated view on cryptocurrencies and blockchain tech, is poised to take the helm at the SEC.

As an S&P 500 company, Tesla’s bitcoin purchase means anyone with money in an S&P Index tracker has some, if minuscule, bitcoin exposure. The bitcoin ETF is a vehicle to gain exposure without purchasing the asset itself. Some argue that there’s a parallel there.

Perhaps more important is the likely approval of Gensler as chairman of the SEC. Gensler’s confirmation hearing was last week, and though he didn’t mention bitcoin ETFs, he’s known to have a deep understanding of cryptocurrencies and other digital assets. 

Morrison said she is encouraged by Gensler’s nuanced understanding of the field.

“Under [former chair] Jay Clayton, it was always ‘not on my watch.’ So we all just sort of backed away,” she said.