Coinbase has apparently been in talks with the world’s biggest asset manager, BlackRock, to ask for advice on launching a crypto Exchange Traded Fund (ETF) according to the unnamed sources of Business Insider.
They say Coinbase has asked for BlackRock’s assistance due to their expertise in launching and managing ETFs, including its iShares division.
Apparently no concrete recommendation was given by BlackRock. It further remains unclear whether this was a one off conversation with BlackRock’s blockchain working group, or an on-going discussion.
What is clear, however, is the fact that bitcoin and crypto ETF applications keep coming, with both Silicon Valley and Wall Street packaging them in a variety of ways in the hope one of them pleases the Securities and Exchanges Commission (SEC).
As they say, if you fail and try again, try and fail and fail and win. Or, hit them with hundreds of applications and requests until like parents they succumb to children’s naggings.
Whether either will work remains to be seen with SEC insisting on requirements for mass surveillance of financial transactions on regulated exchanges.
They want to see all, with the ostensible aim of preventing manipulation, while we can see nothing. Unless, of course, the transactions are on the blockchain, in which case we can see whether they are manipulating too.
One of the reasons why both Silicon Valley and Wall Street are insisting on a crypto ETF is pensions. We do not here mean sixty year old pensioners who should keep their funds in the safest and most boring assets, but late twenty year olds and those in their thirties or forties who are just starting to build up their portfolios.
A number of studies have shown portfolios with cryptos perform better than without even when risk adjusted, and there appears to be a general scholarly consensus that cryptos act like no other asset, making them very useful for diversification in line with modern day portfolio theories.
There are laws/policies, however, which limits institutional investors on the amount they can invest in non-securities. That being only around 10% can go into commodities, while some 90% needs to stay in stocks like ETFs.
If therefore you want to prepare for the long term future and are starting to build your portfolio, there are limits as to just how much you can diversify, with that 10% having to compete for gold, other commodities, private equity and so on.
Yet, for many millennials, a portfolio without cryptos as a hedge might seem absurd because a lot can happen in 10 or 20 years, including a stock market crash or a collapse of the dollar, which is deep in debt with the US government adding one trillion to it a year.
Many of them may therefore think at least 5% or 10% of their portfolio should be diversified into cryptos as a hedge.
The problem is currently there isn’t an easy way to buy cryptos through investment portfolios, unless you go to ETNs on Stockholm’s Nasdaq, because SEC has refused to approve bitcoin/crypto ETF applications.
Their refusal is political, some say, including Hester Peirce, a SEC commissioner, who accused the other SEC commissioners of acting as “gatekeepers of innovation.”
A new commissioner has now been appointed by President Trump, Elad Roisman, who we suspect or at least hope will side with Peirce next time SEC votes on crypto ETFs.
The current composition would probably lead to a vote of 3-2 against if Roisman doesn’t disappoint. That’s because Jay Clayton, the current SEC chair, has shown complete ignorance of this space and appears to be hostile.
The term of one commissioners however, Kara Stein, has already ended and she now has to step down by December. Once she does and if a new commissioner is not appointed in the meantime, then any vote would probably end up in a 2-2 stalemate.
That may mean the next pick for SEC commissioner may have decisive say over vast swathes of the economy as many rules need to be updated to adapt to a digital age, from the Initial Public Offering (IPO) rules, to investment prohibitions.
After the Clayton blunder, therefore, hopefully Trump now makes just the right pick bearing in mind much of the reforms needed to adapt to the digital economy are not a left or right issue so there may be bipartisanship.
As for Clayton himself, who does lay down the general policy and the general direction of SEC, as chair he serves at the pleasure of the president. As a commissioner he can not be fired without cause, but he can be replaced as chair by one of the other commissioner, with Clayton then becoming one commissioner rather than chair of it.
If the votes do go against him, then he’ll probably have no choice but to resign or be replaced as chair as otherwise the situation would be untenable.
All of which may mean that a crypto ETF will probably eventually be approved, although it does all depend on who is the new pick for commissioner. With the other part of the equation being Congress, which may now turn its attention to the mid-term elections this November.
Whether innovation can be made a campaign issue there is unclear, but with ISIS now defeated, and with the social tensions ISIS brought in regards to immigration and so on now starting to subside, all attention may turn to the economy and the innovative pioneers that drive it forward.