Managers hope ‘proxy’ bitcoin funds will finally win SEC approval

US asset managers are attempting to sidestep the Securities and Exchange Commission’s apparent reluctance to approve bitcoin exchange traded funds with applications for products that will provide “proxy” exposure.

The filings with the SEC come as exchange traded products that track the price of the cryptocurrency are already up and running in Sweden, Switzerland, Jersey, Germany and Canada.

Several applications have already been lodged with the SEC for straightforward bitcoin ETFs. Now two fund managers are hoping their bitcoin-related proposals will be the first to get the go-ahead in the US.

KKM Financial, a Chicago-based “boutique investment solutions firm”, has filed for approval to launch the Valkyrie Innovative Balance Sheet ETF.

This would invest “principally in the securities of operating companies . . . that directly or indirectly invest in, transact in, or otherwise have exposure to bitcoin or operate in the bitcoin ecosystem”.

Issuers are going to get creative in order to find ways to service the demand

This could include bitcoin trading platforms, miners, custodians, digital wallet providers and payment facilitation.

Separately, JPMorgan Chase has filed to launch a structured note based on the equity performance of the 11 companies that constitute the JPMorgan Cryptocurrency Exposure Basket.

Just two companies would constitute 38 per cent of the basket; MicroStrategy, a software company that, as of early February, had $3.2bn of bitcoin on its balance sheet, almost half of its then $6.6bn market capitalisation; and Square, the payments company founded by Twitter co-founder Jack Dorsey, which also holds more than $200m of the cryptocurrency on its balance sheet. The list does not include Tesla, which last month disclosed a $1.5bn holding in bitcoin.

“Issuers are going to get creative in order to find ways to service the demand,” said Nate Geraci, president of the ETF Store, an advisory firm.

The applications come as Europe has already approved 23 cryptocurrency ETFs, which had combined assets of $6.3bn at the end of February, according to ETFGI, a consultancy. The first two Canadian bitcoin ETFs, which only launched days earlier, had already amassed a total of $496m by the same point.

A third bitcoin ETF has since debuted on the Toronto Stock Exchange, while there are pending filings for at least five more, including an inverse bitcoin fund proposed by Horizons ETFs for its BetaPro range.

Deborah Fuhr, co-founder of ETFGI, said the launch of bitcoin ETPs in Canada has created less of a premium for other bitcoin vehicles, such as the Grayscale Bitcoin Trust, showing “that an ETF is a better, more efficient structure”.

VanEck and WisdomTree, two of the top 10 ETF issuers in the US, have both filed applications with the SEC to launch plain vanilla bitcoin products, as have KKM, under the Valkyrie name, New York Digital Investment Group and Kryptoin Investment Advisers. There is speculation that Grayscale will follow suit after it posted listings to hire nine ETF-related staff.

However, the SEC has voiced concerns around potential “fraudulent and manipulative acts and practices” and a need “to protect investors and the public interest”.

Jeff Kilburg, lead portfolio manager on KKM’s proposed Innovative Balance Sheet ETF, said the ETF’s underlying model had the potential to be a “bridge” that could “serve as a proxy to investors looking for access to bitcoin”, particularly for pension funds and endowments that may not be permitted to invest in bitcoin directly and retail investors who may have trepidation about direct investment.

KKM has identified close to 50 companies worldwide that hold bitcoin on their balance sheet, a number Kilburg expects…