BlackRock fever: The ETF filing spree and institutional appetite

BlackRock fever: The ETF filing spree and institutional appetite

New York-based multinational investment company BlackRock with $10 trillion assets under management, on June 15, filed for a potential spot Bitcoin exchange-traded fund (ETF) with the Securities and Exchange Commission (SEC) despite the regulators’ history of disapproving such applications. The application by BlackRock allegedly helped Bitcoin snap out of the crypto winter and trade at over $30,000 in the last two weeks.

In its spot Bitcoin ETF application, BlackRock also added a surveillance-sharing agreement that would help tackle any issues broached by the SEC regarding BTC market surveillance and manipulation. Although the SEC is well-known for rejecting Bitcoin spot ETF applications, it also has a strong history of approving BlackRock’s non-crypto ETFs. BlackRock currently boasts a 575-1 approval rate from the SEC, fuelling optimism amongst some crypto enthusiasts.

Despite rejecting Bitcoin spot ETFs, the SEC favours futures-based ETFs since it can monitor crypto futures ETFs listed on the Chicago Mercantile Exchange (CME). BlackRock’s inclusion of a surveillance-sharing agreement would mean that any exchange that lists a Bitcoin ETF will gain access to the spot location where the underlying asset is being traded and therefore acquire important identity and trading information.

Following BlackRock’s filing, two U.S.-based asset management companies, WisdomTree and Invesco, also filed applications for their spot Bitcoin ETFs. WisdomTree is resubmitting its spot Bitcoin ETF application after the SEC rejected it. On the other hand, Invesco is reintroducing its ETF after pulling the plug on its Bitcoin futures ETF in 2021. It’s also worth noting that the filing spree is happening at a time when the same U.S. regulator has been on a suing spree of major crypto exchanges such as Binance and Coinbase for allegedly operating unregistered exchanges.

Inspired by the various ETF applications, Fidelity Investments, another big asset management firm with $4.5 trillion assets under management, filed a Bitcoin spot ETF application with the SEC. Moreover, Fidelity Investments is drafting a proffer to acquire Grayscale, the most prominent digital asset management company. The news about BlackRock filing for a spot Bitcoin ETF and rumours around Grayscale’s acquisition also caused the share price of Grayscale Bitcoin Trust (GBTC) to rise amidst anticipation regarding changing the fund into an ETF.

As a result, the GBTC share price discount also narrowed compared to its net asset value, which is the lowest the discount has gone since September 2022. The share price surge was influenced by investor optimism around the ability to redeem funds in the near future and the possibility of Grayscale winning an ongoing lawsuit against the SEC where it’s seeking to convert GBTC into an ETF.

With an all-time high interest in crypto assets by traditional financial players, it comes as no surprise that Fidelity, Citadel, Charles Schwab, Sequoia, Virtu Financial, and Paradigm have backed EDX, a recently launched crypto exchange. The EDX exchange is a trading platform where client assets aren’t directly managed. Furthermore, the crypto exchange will introduce retail-only quotes.

Nasdaq also announced it’s looking to launch its own crypto custody service platform at the end of Q2 2023 and is currently working on getting all the necessary approvals. Interestingly, Nasdaq isn’t the only TradFi to join the crypto custody bandwagon. It was recently reported that the Deutsche Bank applied for a digital asset license that would allow it to function as a crypto custodian institution in Germany. And in the recently crypto-friendly Hong Kong, the largest bank in the region, HSBC, now enables its clients to trade Bitcoin and Ether.

The move by traditional finance institutions is linked to the increased demand from institutional investors, which has seen TradFi firms step up to bridge the gap, thus signaling a boost in the mainstream adoption of cryptocurrencies. What’s even more interesting is that these moves are occurring just about 300 days before the next Bitcoin halving.

Is failed crypto exchange FTX to be revived again?

John Ray III, the new CEO of the defunct crypto exchange FTX which collapsed in November 2022, has sparked talks of reviving the crypto exchange in an interview he did with the Wall Street Journal. Ray first shared the news about reviving FTX in January and again in April when it was announced that the exchange had recovered $7.3 billion and was working on a plan to refund its creditors and customers.

By the time FTX filed for bankruptcy last year, it had collected about $3.3 billion worth of assets, and continued recovery efforts saw the company recover $800 million in cash and another $600 million in investments and settlements receivable. FTX’s biggest gain was in its ‘category A crypto’ tokens with liquid and large markets that saw it regain control of over $4 billion of digital assets, coupled with a recovery in digital currency prices, which put over $1 billion back into FTX’s account.

The company intends to conclude its assessment by the end of June and advise on the possibility of restarting its operations in 2024.

MakerDAO’s DAI: Less USDC but more RWA

Although DAI is considered the biggest crypto-backed stablecoin issued and managed by a decentralised autonomous organisation (DAO), crypto sceptics have been reluctant to call it a fully decentralised stablecoin as it has historically been backed on a 1:1 ratio to USDC. Stablecoins enjoy their price stability by being backed by a fiat currency, a precious metal, a cryptocurrency, or an algorithm. DAI had its value largely pegged to USDC, a centralised stablecoin backed by fiat money and issued by Circle.

However, DAI has significantly reduced its reliance on USDC as collateral since the beginning of 2023. DAI’s USDC collateral was $2.4 billion then, but that has currently dropped to nearly $520 million. Even with the USDC exposure rundown, what remains unclear is whether DAI will finally be considered a truly decentralised stablecoin.

Although the project has some exposure to USDC, the rundown of USDC as collateral resulted from MakerDAO’s interest in diversifying its balance sheet to include real-world assets (RWA). RWAs are tangible assets that ‘live’ in the physical world but can be brought on-chain. For instance, MakerDAO has so far transferred $500 million worth of USDC to Coinbase Custody to earn returns and used around $1 billion of its USDC reserves to buy U.S. Treasury bills. While the tokenised U.S. government bonds might be held on-chain, they are still controlled by a centralised entity that hosts the treasury bonds.

While MakerDAO’s latest move might not make DAI a purely decentralised stablecoin, the move to RWAs is quite exciting. It provides the stablecoin with an excellent avenue to generate some interest because treasuries currently pay substantial interest.

IMF Working on Global CBDC Platform Concept

The International Monetary Fund (IMF) is working on a global central bank digital currency (CBDC) platform to aid cross-border transactions. The news was shared by Kristalina Georgieva, IMF’s Managing Director, during a conference in Rabat, Morocco. Such a platform would allow countries to enforce capital controls and compliance checks while cutting down on payment costs. Given that the platform would be a blueprint for cross-border CBDCs, it would strengthen and guarantee greater interoperability, safety, and efficiency in cross-border payments.

And while still on the topic of CBDCs, the Latin America and Caribbean (LAC) region is witnessing an increased interest in CBDCs, even with varying crypto utilisation. So far, several LAC countries have made great strides in introducing CBDCs to either boost the payment systems’ strength and financial inclusion or reduce cross-border remittance costs.

Although many countries outside the LAC region are yet to embrace CBDCs, the IMF offered a few highlights on how countries can effectively manage crypto risks while still adopting the use of CBDCs and the innovation they offer. One such recommendation was for countries to focus on the basic drivers of crypto demand and improve transparency instead of outlawing them.