‘ETFs Are Inevitable But Not Imminent’, Crypto Expert Argues

Talking to Cryptonews, crypto expert Peter Eberle discussed the potential for crypto exchange-traded funds (ETFs), the impact of the Grayscale-US SEC battle, the current state of crypto investments, and the relevance of regulatory clarity in the space.

Eberle is the President and Chief Investment Officer of Castle Funds, an investment firm that has been managing funds invested in bitcoin (BTC) and other digital assets since 2017.

“ETFs are inevitable, but not necessarily imminent,” he told Cryptonews.

Whether index products of multiple tokens or single-token products such as those already listed in Canada and other jurisdictions, spot crypto ETFs solve one problem, he said - access to crypto in an existing brokerage account.

Digital asset management firm Grayscale GBTC product’s popularity is an indicator of this market segment size. That said,

“The GBTC product is not an ETF, and as such suffers from high fees, limited liquidity, and a lack of an arbitrage mechanism to keep the performance of the GBTC market price in line with the performance of the Bitcoin it holds.”

In late August, Grayscale won the case against the Securities and Exchange Commission (SEC) over the latter rejecting the firm’s spot Bitcoin ETF application.

But per Eberle, the Grayscale appeal has limited effects on the industry.

“The Grayscale appeal does not mean that conversion to ETF or some other continuously redeemable product must be approved; it merely states that the SEC did not meet the Court’s standard for suitably explaining their reasons for rejection.”

The appeal, however, could pressure the US Congress to work on digital asset regulations.

Without a Congressional mandate, the regulators are limited to enforcement actions such as those taken against Binance and Coinbase, discussion over product-specific rule changes, and issuing cautionary investor-protection educational materials, Eberle said.

Kick-starting the Process

Making crypto investments is much easier and safer today than it was as recently as 2021, according to the CIO, thanks to the rise of analogs to traditional financial services.

Investors, for example, can choose between several regulated custodian banks to hold their coins away from crypto “exchanges” such as the failed FTX.

“This provides a vital segregation of assets, rights, and responsibilities, which were often ambiguous earlier in the democratization of digital asset markets.”

There is still “a great deal of work” to be done in “adding consistency and legal certainty” to the digital asset markets.

Per Eberle,

“The resolution of the spot-market ETF question and other regulatory changes in the US will kick-start this process by answering the threshold questions of which agency has responsibility for each market segment.”

Additionally, the costs of trading, custody, and settlement are still high, but Castle Funds expects these to drop with the rise of specialist firms that will compete in a segregated market after the Coinbase and Binance enforcement actions are resolved.

Spot crypto ETFs will give investors “a relatively cheap and secure way” to gain crypto exposure in their existing brokerage accounts, Eberle said, providing a list of knock-on effects:

• previously unmet demand for the coins is satisfied by the ETF, and prices on the underlying tokens are driven higher;
• if GBTC is offered a conversion path to ETF, it could result in selling pressure on BTC as leveraged traders seek to close out their positions and capture the arbitrage profit due to the historic discounts;
• poorly designed ETFs could result in a splitting of the markets into “clean” BTC (from regulated sources) and “dirty” BTC (which can’t be adequately traced to owners);
• market volatility could cause problems with the liquidity of the ETF, as the ETF settles on a T+2 business day basis and the underlying BTC settles roughly every 15 minutes with no breaks.

USA's 'Significant’ Body of Law Can Quickly Shape Crypto Regulations

Given their clarity, the EU’s Markets in Crypto-Assets (MiCA) consultations are currently ahead of the US regulations, Eberle said.

The US is still in the process of splitting out the regulatory space (i.e., securities, commodities, payments and banking, etc.).

He stated that,

“The MiCA “clean sheet of paper” approach, while consistent with general principles of sound financial regulation, may ultimately seem like a more direct path to regulated crypto asset service providers as it appears to be more tailored to the needs of digital asset service providers.”

But the US can still rise strong, Eberle argued, saying that,

“The US has a significant body of securities and banking case law which will quickly shape the eventual regulations once the threshold questions of supervisory authority and overlap are resolved.”

Eberle opined that any new financial regulation implementation is “a substantial investment,” which also requires “some fortune-telling,” as the regulations can change in scope and impact over time.

The US has a number of “substantially regulated paths” to crypto investment, and investors can be more informed in the choices if the can see the differences between regulated and unregulated markets, the CIO concluded.