August 11, 2023
Greg Cipolaro

Research Weekly - The Race for Crypto ETFs Keeps Expanding


  • The number of crypto ETFs hoping to launch has exploded in the past two weeks. We look at the implication of these developments, plus the strategy one fund took to get ahead.
  • Fintech giant PayPal has entered the game with its own stablecoin, but is it really a replacement for the maligned Binance USD?

The ETF Race Keeps Expanding

The number of sponsors hoping to get new ETFs launched on US exchanges has exploded again in the past two weeks, this time focused on futures-based products. While the previous frenzy was touched off by BlackRock’s filing for a spot bitcoin ETF, the recent frenzy started with Volatility Shares’s filing for a fund based on ether futures traded on the CME. Since that filing on July 28th, 12 other funds have sought to come to life, with one leapfrogging the Volatility Shares filings in terms of its potential launch date.

The newly filed funds differ from the existing spot bitcoin applications in the works in several key areas. First, the newly filed ETFs hope to invest in ether or a mix of bitcoin and ether futures traded on the CME. If approved, these would be the first US-listed ETFs that invest in a derivative of ether, the native asset of the Ethereum network. Bitcoin futures ETFs have been available since November 2021, with the largest being the ProShares Bitcoin Strategy ETF (BITO) with $1.1B in AUM, but an ether futures ETF has never been approved in the US. There have been several attempts at launching one, but all previous applications have been withdrawn.

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The second key difference is that the latest round of ETFs seek to come to life under the protections of the Investment Company Act of 1940 (’40 Act), while the spot bitcoin ETFs filed in the middle of June seek to come to life under the Securities Act of 1933 (’33 Act). The ’40 Act is the same avenue bitcoin futures ETFs used in 2021, and their approval process is entirely different than ’33 Act funds. Daily liquid '40 Act funds launched by a registrant that already has other effective funds go through a 75-day notice period under Rule 485(a), while ’33 Act Funds go through a multi-stage review process lasting up to 240 days in total. After 75 days, the registration statement for one of these ’40 Act funds is deemed to be effective if no stop order has been issued, and the funds can begin trading. This is the process BITO went through in 2021. Amendments to registrations that have already been deemed effective can become effective in 60 days or less. This is how Valkyrie leapfrogged Volatility Shares. By changing the Valkyrie Bitcoin Strategy ETF (BTF), which only holds bitcoin futures, into Valkyrie Bitcoin and Ether Strategy ETF, which holds bitcoin and ether futures, it can reduce the period in which it can be deemed effective from 75 days to 60 days.

There is, of course, no guarantee any of these funds, futures or spot based, will be approved. While bitcoin got a substantial bump following the BlackRock spot filing, rallying over 20%, there seems to be little fanfare around the newest crop of futures-based ETFs. The spot price of both ether and bitcoin are little changed, as is the basis for both products, the difference between futures and spot prices. This is a very different effect on pricing than seen around the BITO launch in 2021, which resulted in both spot appreciation and a widening of the basis. The events around the BITO launch were as follows:

  • August 3, 2021 - In a speech at the Aspen Security Forum, SEC Chairman Gary Gensler says "I anticipate that there will be filings with regard to exchange-traded funds (ETFs) under the Investment Company Act (’40 Act). When combined with the other federal securities laws, the ’40 Act provides significant investor protections."
  • August 4, 2021 - BITO ETF registration statement is filed.
  • October 18, 2021 - 75 days after the filing of the registration statement, the BITO registration statement becomes effective.
  • October 19, 2021 - First day of trading.
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As we said, we don’t know the likelihood of these new futures-based ETFs or the spot ETFs filed in June being approved. On the futures product side, we do believe, however, that with each day that passes without a withdrawal or rejection, the likelihood of approval goes up. Judging by the lack of price action in the wake of these filings, it seems as though investors are not convinced of their ultimate approval. Or perhaps that lack of movement is the opportunity for the intrepid investor. Rest assured, it seems that we may know the answer to these questions in less than two months, potentially well ahead of a final decision on the existing bitcoin spot ETFs.

PayPal Enters the Stablecoin Game

This week, fintech giant PayPal entered the stablecoin game with the launch of PayPal USD (PYUSD). The stablecoin will be issued by Paxos Trust Company, much like the Pax Dollar (USDP) and Binance USD (BUSD), the latter of which created quite a bit of controversy resulting in a Wells notice issued to Paxos (no enforcement action yet we are aware of) and a forced wind down by the New York Department of Financial Services. Some are pointing to PYUSD as a replacement for the ill-fated BUSD, and while they have similar characteristics in terms of issuer, attestations, reserve reports, and blockchain (Ethereum), this assertion misunderstands the financial position of the issuer.

In our view, the heart of the differences relies on the strategic differences between the organizations. Binance is an exchange, while PayPal is a payments conglomerate. Binance is, for the most part, a crypto-only exchange, meaning its trading is largely quoted in cryptocurrencies, like Tether (USDT), and not in US dollars or another fiat currency. This makes the exchange reliant, both in terms of technical competence and regulatory compliance, on the issuers of these stablecoins. Given the controversies that have surrounded Tether over the years, it is understandable that this alliance of convenience could also present risk. BUSD was launched in the fall of 2019 and since that time Binance has offered various incentive schemes to boost its trading volume, essentially variations of no-fee trading on major coins, such as bitcoin. As such, BUSD grew in size and importance, and at one point, Binance created a program to convert competing stablecoin balances and transfers into BUSD, that is except Tether. Things went awry when Binance started “wrapping assets”, holding assets in collateral on one chain then and issuing them on other chains, like its own BNB Chain, sometimes without the appropriate collateral. With BUSD being in wind down mode by regulators, Binance has offered free trading in other stablecoins, such as TrueUSD (TUSD), which has an opaque ownership structure, and the newly created First Digital USD (FDUSD). Regardless of the history, for Binance, stablecoins have always been about the facilitation of trading and movement of money in and out of the platform.

PayPal, as a payment company, is touting its new stablecoin primarily for purchases and the movement of money – transferring PYUSD to external wallets, sending to another person, funding purchases, and finally, converting to other cryptocurrencies, according to its press release. It is still early, but we have not seen any announcements of exchange integration. While the technical integration of an ERC-20 token on an exchange would be a fairly trivial exercise, PYUSD markets would need to be created for it to take off in the trading context. Given our expectation that PYUSD will be mostly used to facilitate payments and remittances, we are excited to see where it goes. It has the same underlying issues as the US dollar, for which currencies like bitcoin offer a very different economic promise, but stablecoins have emerged as one of the big use cases for digital assets.

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Market Update

Weekly 4-Dec-02-2022-05-16-25-0983-PM

It was a quiet week once again in crypto markets. Bitcoin was largely unchanged, up 0.4%, even as declining inflation data provided a midweek jolt to risk assets. Equities were down on the week as the bump provided by Wednesday’s CPI reading was short-lived. The S&P 500 fell 0.7% while the Nasdaq Composite fell 1.6%. Gold fell 0.9% on the week even as real rates fell, while gold rose 1.6%. Bonds rallied amidst the declining inflation trends, with investment grade corporate bonds rising 0.6%, high yield corporate bonds rising 1.0%, and long-term US Treasuries up 0.85%.

Important News This Week


Bitcoin Outperforms Crypto Hedge Fund Returns in First Half - CoinDesk

Crypto Fund Performance in 2023: A Half-Year Review and Analysis - 21e6 Capital

Long-Term Bitcoin Holder Metric Hits New All-Time High - Decrypt

Genesis 2Q 2023 Observations - Genesis Trading

Regulation and Taxation:

Federal Reserve Board Provides Additional Information on Its Program to Supervise Novel Activities in The Banks It Oversees - Federal Reserve Board

Crypto Asset Trading Platform Bittrex and Former CEO to Settle SEC Charges for Operating an Unregistered Exchange, Broker, and Clearing Agency - SEC

Bitstamp To Halt Trading in Polygon, Solana and Other Tokens in The US - The Block

Congresswoman Maxine Waters Says She’s ‘Deeply Concerned’ About PayPal’s New PYUSD Stablecoin - CoinDesk

SEC Delays Decision on Ark 21Shares Spot ETF - SEC


PayPal Launches U.S. Dollar Stablecoin - PayPal

OPNX Exchange Touted by Three Arrows Founders Bids for Hodlnaut - Bloomberg

Bitdeer Completes Mining Facility in Bhutan, Gets New Rigs to Boost Capacity - The Block

New Core Scientific CEO Expects Company to Exit Bankruptcy by Year End - Blockworks

Jump Crypto Backs $5M Round for Bitcoin Wallet Xverse - CoinDesk

‘Plain Vanilla’ PayPal Stablecoin Betting on User Base - Blockworks


Fireblocks Discloses ‘Zero Day’ Vulnerabilities Impacting Leading MPC Wallets - CoinDesk

GG18 and GG20 Paillier Key Vulnerability [CVE-2023-33241]: Technical Report - Fireblocks

Looking Ahead: Lightning Payments in 2025 - River

Upcoming Events

Aug 25 - CME expiry
Sept 1 - Expected SEC response date for BlackRock iShares ETF

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