Canadian regulators have recently approved the launch of the Bitcoin Listed Index Fund (ETF) product in a row. This is the first time in North America.
First, Canadian asset management company Perpose Investments listed BTCC, a bitcoin ETF, on the Toronto Stock Exchange on February 18 in the form of a public offering. On the same day, Evolve also listed its Bitcoin ETF EBIT on the Toronto Stock Exchange.
The cryptocurrency industry was shaken when news of the launch of the first North American Bitcoin ETF in Canada was announced. Above all, there is a growing expectation that institutional investors, who have been hesitant to invest directly even though they are interested in bitcoin, have opened a way to indirectly invest in bitcoin.
Canadian financial authorities have rejected the launch of Bitcoin ETFs that companies have applied for multiple times in the past. A representative example is the rejection of the launch of the Bitcoin fund, which Canadian investment management company 3iQ applied for in 2019. In rejecting 3iQ’s application to launch a bitcoin fund in 2019, the Ontario Securities Commission (OSC) of Canada announced that it was too early to issue a bitcoin fund through public offering. Looking at the decision at the time, the reason for this judgment can be found in detail.
“Market immature makes valuation difficult”
Canadian financial authorities first thought that in order to sell products such as bitcoin funds in the form of public offerings, risk management should be properly carried out. Beyond simply notifying investors about existing risk factors, it is necessary to be able to manage risk at the manager level as well.
OSC believes that it is difficult to reliably evaluate the value of bitcoin, so the necessary risk management can also be difficult. Cryptocurrency regulations vary from country to country, and the reputation of individual exchanges also varies widely. This regulatory gap makes it difficult to properly evaluate the value of Bitcoin.
In its decision, OSC also pointed out that price volatility such as bitcoin is large due to’pumping and dumping’. OSC argued that the phenomenon of large price fluctuations due to actions such as pumping or dumping is a characteristic that appears only in the new, in other words, immature asset markets.
“No safe consignment is possible”
The difficulty of safely storing cryptocurrency assets such as bitcoin is one of the main reasons OSC rejected 3iQ’s application to launch a bitcoin fund in 2019. In the eyes of the regulators, there is a lack of means to ensure that the trust companies keep their cryptocurrency secure.
At the time, 3iQ insisted that cryptocurrencies could be safely stored in cold storage offline, and orders could be smoothly fulfilled through re-consignment companies. On the other hand, regulators found that cryptocurrency is a new type of digital asset, and it is difficult to store secure assets on the grounds that companies entrusted or re-consigned cannot purchase insurance in case of losing bitcoins.
As such, OSC did not approve the issuance of the Bitcoin fund in 2019, as it judged that the sale of the Bitcoin fund was premature, both in terms of institutional and physical facilities. In particular, it is possible that the market and regulatory environment were not mature enough to sell in the form of a public offering.
Things that have changed in 2 years
Two years later, in February 2021, Canadian financial authorities approved the first public offering of Bitcoin in North America. What changes in the past two years have caused the financial authorities to change their attitudes?
Above all, the regulatory environment has changed. In particular, there have been many changes in the United States, the country next door. The U.S. Monetary Authority (OCC) issued an opinion statement in July 2020 that the Federal Bank could conduct a cryptocurrency consignment business.
Anchorage, a cryptocurrency trustee, was the first cryptocurrency trustee to obtain federal bank approval in January 2021. Thanks to these changes in U.S. regulators, Canadian financial authorities may also have positively reviewed the issuance of a public offering Bitcoin ETF.
Compared to 2019, the environment for safe storage of cryptocurrency assets has also improved. Cryptocurrency consignment businesses have stabilized, and consignment companies have begun to provide insurance as well.
Bitcoin’s price volatility has also eased. It is true that price volatility is still large compared to gold and raw materials, but the difference in volatility between traditional asset prices and bitcoin tends to gradually decrease.
Will the US authorities see a change in attitude?
Currently, several applications have been submitted to the US Securities and Exchange Commission (SEC) awaiting approval for the launch of the Bitcoin ETF. The SEC won’t approve all of these, but it’s likely that at least some will someday.
The approval of the Bitcoin ETF by financial authorities means that institutional investors are increasingly likely to buy Bitcoin. As a result, there is a high possibility that the bitcoin consignment business will develop further in the future.
Currently, in the United States, several companies are already operating cryptocurrency consignment businesses under the approval of the financial authorities. In Korea, there is a need to change the regulatory environment to keep pace with this global trend.
Edited by: Insun Jeong/Coindesk Korea
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