Singapore Blockchain Week, ETF’s, STO’s & Utility Tokens
The theme around the recent Blockchain week in Singapore was all about traditional and institutional money coming into the crypto space via ETF’s, STO’s or ETO’s. General agreement centered around the current utility token model being broken in its current state along with a lack of depth in the current crypto liquidity pool, resulting in a need for a maturation of the space and a fresh injection of liquidity.
Naturally this was based on fostering an environment in which traditional and institutional investors are able to confidently invest in new asset classes using the safety of institutional finance frameworks.
For a full recap on the weeks events, check out “Thoughts on Singapore Blockchain Week” written by XSQ CEO Zhuang.
Wolf Crypto were asked to give our opinions on ETF’s and STO’s during the week. Our response is posted in full below.
Why do you think the SEC keeps rejecting Bitcoin ETF’s, other than their official response?
It’s important to note that, like cryptocurrenices, not all ETF’s are created equal. Dating back to the initial Gemini submission in 2017, we’ve seen a raft of different ETF offerings go under submission to the SEC, and as we know, all of which have been rejected. These submissions have come from traditional finance entities, such as CBOE and CME, and other non traditional fintech entities, like Gemini, VanEck and SolidX.
It’s quite easy to write off SEC rejections as a simple dislike or distrust of Bitcoin. However it goes much deeper than that and is more about setting up a structure or framework in order to regulate a new and untested asset class.
Bitcoin as been defined by the US Commodity Futures Trading Commission as a legal commodity, ticking the box and keeping it in line with other traditional ETF’s, gold, silver, copper oil etc. So in that sense, this is not the sticking point for lack of approval. What those market places do have in common is cohesion when it comes to structure and reporting.
Unlike traditional assets classes and their subsequent ETF’s, which are traded in tier one exchanges and have information sharing agreements with the SEC, crypto exchanges, some centralized, some decentralized, and based in all sorts of jurisdictions, do not, and as we all know, more so than traditional exchanges, crypto exchanges are fraught with fake volume and manipulation. It was concerns over such manipulation in the market that lead to the rejection of of the Gemini ETF in its latest form.
So to answer the question, it is more a case of structural and reporting concerns around the actual ETF offering and its backers being appeased, more so than it is anything to do with the underlying asset class in Bitcoin.
What do we need for SEC Bitcoin ETF approval?
As mentioned previously, not all ETF’s are created equal, and this is the main point when it comes to the potential approval of a bitcoin based ETF.
We’re of the opinion, that at least for the initial round of approvals, the successful submissions will need to come from a traditional backed entity to appease the afore mentioned concerns of regulators. In a sense, not only is this a prudent move from the regulators perspective, but its also good for the overall crypto market and community. The last thing we want is for an ETF to be approved that then runs into issues.
In this sense, we see the ICE backed Bakkt being one of the precursors to the first round of approvals. While it’s not an ETF in itself, its three main offerings are a “consistent regulatory construct”, institutional grade pre and post trade infrastructure and “transparent, efficient price discovery”, all of which will form the structural basis on which crypto ETF’s can be issued. The fact it’s backed by ICE, who is already a market leader when it comes to global exchanges, is hugely appealing from all sides.
Another big point to take from the Bakkt offering is that it does NOT allow trading based off margin and leveraged trading. Again, that is a huge plus, with the likes of BitMex and their obvious manipulation in the market place, while operating in a non regulated environment, and allowing non KYC’ed traders to participate on the platform, sullying the marketplace with their, doginess/scamminess, these are the exact issues regulators are hoping to avoid, which Bakkt hopes to solve and while could lead to the first onslaught of approved ETF’s.
Is it possible to have Crypto ETF in the future? If it is possible, how long will it take to get SEC’s approval?
It’s important to note the difference in question between the first questions on a Bitcoin ETF and this one of a “crypto” ETF.
The pragmatic approach to ETF’s will come in the form of a Bitcoin ETF initially, with other crypto or mixed crypto offerings to follow. Bitcoin is the granddaddy of all cryptos, with the most widespread adoption and most mature and robust network. It’s simply common sense to use this as the first use case of an ETF.
To answer the question directly, yes it is extremely possible, and with offerings such as Bakkt coming into the space, is more likely than ever. The how long it will take is kind of the million dollar question here though isn’t it? And to be fair, I don’t think any of us really can say with any certainty. If we were to place a bet on it, we’d be putting our money behind a first half of 2019 approval, though we’re more than happy to be wrong on that one, and have it come sooner rather than later!
Do we really need Crypto ETF’s? Please provide us the detailed reasons of your opinion.
One of the interesting things about a crypto ETF is the analogy that can be drawn between the historically most successful traditional market ETF, the SPDR Gold backed ETF of 2004. The main reason this was so successful, was that it is MUCH easier to trade a gold via an ETF than actually holding and trading a physical item such as gold.
In regards to how that relates to crypto, even though its a digital asset, and by its very nature of being so, breaks down the barriers of a physical item such as gold, we still face major barriers to entry, the complication of setting up digital wallets, exchange accounts and chain of custody when it comes to digital assets. So in that respect, an ETF in itself brings a layer of accessibility that is missing from the crypto space right now.
One of the buzz words around ETF’s is “institutional”, and while that may be true in the sense they will be the players that enable this next layer of accessibility, the major benefit of an ETF is who will be able to buy digital assets off these enabling institutions, in a word, normies.
An ETF will allow an additional aspect of liquidity via accessibility to normie money that is still missing from the crypto market place at this point in time, and in that sense, can only be viewed as a good thing.
How will Crypto ETF’s change the whole blockchain and cryptocurrency industry? Please give us one or two main points.
We’re not sure if “changing the whole blockchain and cryptocurrency industry” is what will actually happen there. We see ETF’s as an additional layer of part of the overall crypto ecosystem, something that adds to, rather than fundamentally changes.
As previously mentioned, its going to add a structural component and if done correctly, stability component, along with additional accessibility to normie money that is missing from the marketplace at this point in time. We see this as a further bridge between the non traditional and traditional marketplaces and liquidity pools, in the sense it allows normies to easily trade crypto, and in fact, use it as a hedge against other asset classes being traded, especially when this offering come in the form of exchanges/brokers/infrastructure they are already using.
Often times, people say Wall Street or financial types screw with innovation, will an ETF derail the product innovations in the blockchain space?
We don’t think the ETF per say will have an effect on innovation, although the introduction of an ETF into the crypto markets is somewhat of an innovation in itself, as discussed with Bakkt earlier, however past the implementation of actually setting it up, an ETF is more based around impact on the pricing in the marketplace, as opposed to a pure technical innovation.
In that sense, we see ETF’s as being a good thing. Additional liquidity and accessibility to crypto asset classes can only be a good thing, especially when done in the right way, which again, isn’t based off margin, leverage or cash settlement, but instead trading in the actual asset class and as such giving an additional layer of depth to the market. This will only help Bitcoin’s claim to store of value, as opposed to a transactionary currency. The downside is that this could actually stifile Bitcoins innovation in some respects, as more holders equals less transactions, equals less need to develop the underlying network. Sounds gross to say it, but this is where something like BCH could help fills the gaps, if this were to be the case.
In regards to stifling innovation, again, more liquidity and accessibility in the marketplace means there is more funding and more support for additional projects to be funded and built. As long as we don’t see a return to the early ICO days of throwing money at any idea or whitepaper, we see this as being overall a good thing for the industry.
Why the SEC? Why is the opinion of a few elite classes of important? Is the ETF the only way to connect capital markets?
This is the result of living in a US centric world and with the US based market place being the biggest and most appealing marketplace in the world. From all available reports, the addressable market in the US is 3.4 trillion. When you’re talking crypto and a current marketcap of circa 200 billion, that’s a huge step up from where we’re currently at.
There is a pragmatic approach to appeasing the SEC concerns as well. As we’ve seen across many industries, the long arm of US laws have quite some reach. While not crypto related, we’re reminded of the case of the ‘super hacker’ Gary McKinnon who hacked into US based military computers from the comfort of his London based flat. He faced extradition to the US and prosecution under US laws for the simple fact he accessed US resources via the Internet, despite having never set foot in the US and being a citizen of a foreign county.
While this may be an example on the more extreme end of the spectrum, it’s still related to the niche we find ourselves in with the way digital currencies operate in a technical manner. The SEC actually has a “Cyber Unit” that has its sights set on the ICO and cryptography markets across the world. With SEC laws drafted as laws of inclusion rather than exclusion, being a foreign based entity most likely isn’t enough to escape their reach. While the trigger for this may be selling to US investors as part of an ICO campaign, there are also concerns around the ability for US based investors to participate in the trading of a token post ICO and what exposure this gives a company or ICO to SEC regulations, especially if they have any assets within the US itself.
This is probably going to be further exacerbated with the advent of STO’s and ETO’s, securities in truest sense of the word.
Security Token Offerings, are innovations in that space more important? Are they mutually exclusive?
In our opinion, STO’s, ETO’s, or hybrid STO/Utility style offerings will foster in the next wave of innovation and growth in the sector. There’s a great deal of cynicism in the crypto space around utility tokens, their network effects and the ways in which ICO’s who are supposedly building these networks and gaining adoption can simply divest themselves of any responsibility of doing so, and any responsibility as to the value of a “valueless” utility token.
Having a token which is actually asset backed is the ideal way to help fix some of these issues and appease the growing distrust investors are facing when it comes to utility tokens. However, the big issue with a plain STO token is that it is simply a digitized share assets. It represents a share in the company or ICO and the resulting dividend or royalty, but has no actual network effect. In our opinion, network effect is what made utility token models so powerful and appealing when done correctly. So what we’re currently working on, and what we’re really excited for, is the merging of security and equity tokens with utility tokens and the models that come from it. Both models solve a different set of issues and combined together, can provide the ultimate solution for all of the issues we’re currently encountering.
We believe that ETF’s certainly have a part to play in this in regards to structure, stability and liquidity, so to answer the question, no they are not mutually exclusive, but we do think the two complement each other and work together to achieve a similar end goal, that of a more stable, structured, accessible, and mature crypto ecosystem.
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