A new era of digital assets may soon be arriving. Several large and renowned money managers, including BlackRock and Grayscale, have pending applications for offering a spot Bitcoin ETF, and signs are pointing toward eventual U.S. regulatory approval. This would effectively make the gold standard of digital assets a fully tradable and regulated investment product. The implications of this understated breakthrough could be profound.
If a spot BTC ETF does come to fruition, we are likely to see an influx of institutional investors allocating capital into the asset – which in turn could usher in a wave of maturation across the digital asset industry at large.
To see why, it is instructive to look briefly at the ongoing maturation of autonomous (DAOs). Like Bitcoin, DAOs make use of via blockchain – but as we at Cartan know from our experience advising some of the world’s largest DAOs, only once DAOs integrated with established legal structures, such as the Cayman Foundation Company vehicle, could they truly gain traction.
A similar situation is foreseeable with a spot BTC ETF. The blockchain-based digital asset of BTC would essentially fuse with the established ETF framework, serving as an onramp for those on the sidelines.
The primary upshot of wrapping BTC in the familiar investment vehicle of an ETF would be to provide what has long been elusive in the digital asset sector: regulatory clarity.
Without regulatory clarity – meaning there is no familiar investment vehicle for digital assets that fits into funds’ established investment mandates – a typical asset manager must jump through many hoops to allocate capital into BTC:
• Obtain board approval to invest in a risk asset that falls outside the fund’s mandate
• Amend the fund’s investment mandate
• Find a custodian for the asset and fulfill KYC verification
• Implement operational changes including assigning a finance team for accounting and reporting, and building a trading plan
• Modify internal systems such as compensation and compliance
• If liquidity is required for time-sensitive trading opportunities, find short-term financing from sources outside their traditional broker or bank
This onerous process exists because of the unique, unregulated nature of the asset, and requires a timeframe of 9-12 months before a single BTC can be purchased.
An ETF, on the other hand, is not unique, and is regulated, meaning the process for investing in BTC via a spot ETF could be completed within a day, and purchased with no money down using credit from a broker or banking partner. What’s more, the ETF product would give funds and their investors improved security in the form of established standards of custody and internal controls.
The impact of a spot BTC ETF would send out further ripples across the sector.
Just as the regulatory clarity of an ETF is likely to attract institutional capital, so too can we expect it to in adjacent industries. Already the Financial Accounting Standards Board has been working toward clearer guidance on how digital assets should be classified and valued; with an ETF, gone would be the days where accountants make a best guess about whether a digital asset should be classified as an investment, inventory, or intangible asset.
Beyond accounting, insurance, tax, and auditing industries would likely welcome the newfound clarity and evolve their own practices to align with the evolving sector.
This wave of maturation and influx of capital could foreseeably spill over into other projects that use tokens other than BTC, whether for DeFi, gaming, NFTs, tooling, or otherwise.
At Cartan, we’ve helped numerous innovative take advantage of prior regulatory evolutions, and we maintain an adaptable approach to how we provide value through our expertise in the technological and financial infrastructure of blockchain. We look forward to seeing the continued growth of this sector and to helping clients – including those that are blockchain-based and those newly moving into – navigate toward success.
Chloe Zhang also contributed to this post
The information provided in this blog post is intended for general informational purposes only and should not be construed as financial or investment advice. Readers are encouraged to consult with their own financial advisors, conduct independent research, and make informed decisions based on their unique financial circumstances. By reading this blog post, you acknowledge and agree to this disclaimer, understanding that the information presented herein is not intended as financial advice or a recommendation to buy or sell any financial instruments.