Written by Elizabeth Howcroft and Hannah Lang
LONDON/WASHINGTON (Reuters) – The launch of a U.S. exchange-traded fund (ETF) to track Bitcoin deepens the ties between the volatile world of cryptocurrencies and the traditional financial system, opening new and unexpected risks. Some experts say there is a possibility that
The Securities and Exchange Commission (SEC) this month approved 11 spot Bitcoin ETFs from issuers including BlackRock and Invesco/Galaxy Digital, in a watershed moment for the cryptocurrency industry, which has been plagued by bankruptcies and crime. did.
The SEC had long rejected the product, citing investor protection concerns, but was forced to reconsider its position after losing a court challenge by Grayscale Investments.
Cryptocurrency enthusiasts claim the product will allow investors to more easily and safely access Bitcoin. However, in approving the product, SEC Chairman Gary Gensler warned that Bitcoin remains a “volatile asset” and investors should be cautious.
The ETFs have a combined total of about $21 billion in assets, and some analysts predict they could collect up to $100 billion from retail and institutional investors this year alone. Since the product's launch, Bitcoin has fallen by more than 6%.
Some ETF experts believe that if the product is widely adopted, it could exacerbate the volatility of Bitcoin prices during times of market stress or create a divergence between the ETF and Bitcoin prices, causing other problems in the financial system. may pose a risk to some investors, he said, citing evidence of past ETF volatility. event.
Some say the turmoil in the U.S. banking industry last year showed that financial and crypto markets can transmit risks to each other. For example, crypto financier Silvergate Bank liquidated following withdrawals triggered by the collapse of crypto exchange FTX, which regulators say caused panic and contributed to Signature Bank's collapse. Stated. Meanwhile, the failure of Silicon Valley Bank triggered a bank run on the stablecoin USD Coin.
“When investors pour money into these products, they significantly increase the risk of significantly expanding the interconnections between the core of the financial system and the crypto ecosystem,” said advocacy group Better, which had asked the SEC to reject it.・Markets CEO Dennis Kelleher said: Regarding Bitcoin ETFs, it cites risks to investors and the financial system.
Bitcoin was invented in 2009 as an alternative payment mechanism and is primarily used as a speculative investment. The average daily volatility is about 3.5 times that of stocks, according to Wells Fargo Investment Research.
Antonio Sánchez Serrano, chief economist at the European Systemic Risk Board, the European Union's financial risk watchdog, said Bitcoin ETFs can have their volatility “particularly exacerbated” during market stress. It said there could also be other channels through which ETFs could create systemic risk.
Those other channels include the decoupling of ETF prices and underlying assets, which can cause stress for financial institutions that are heavily exposed to the product or rely on ETFs for liquidity management. there is.
In an email to Reuters, Serrano wrote that the Bitcoin ETFs, which he classified as complex, “are far too different from regular equity ETFs in terms of the risks they incorporate.”
Complex, illiquid and highly leveraged exchange traded products have been under stress in the past.
In February 2018, a spike in volatility caused a publicly traded bond that tracks volatility to collapse, costing investors $2 billion.
In 2020, the government shutdown due to the coronavirus disease (COVID-19) triggered a sell-off of some corporate bond ETFs. CFA Institute, an investment specialist organization that also studies ETF risks, argues that stress would have spread to the broader fixed income market had the Federal Reserve not provided emergency support such as buying bond ETF shares. are doing.
The ETF industry generally disputes that its products pose systemic risk.
Bitcoin ETF issuers list a number of market, policy, and operational risks in their risk disclosures, but acknowledge that Bitcoin's immaturity means some risks may be unforeseeable. ing.
The SEC did not respond to requests for comment.
“Tomorrow's failure”
Indeed, the risks depend largely on how widely the ETF ends up being adopted, Serrano and other experts said.
Olivier Fiennes, head of EMEA advocacy and policy research at the CFA Institute, said in an email that “systemic risk is all about scale…we still don’t know enough about who is actually buying and in what proportions.” “I haven't.”
Crypto industry executives also point out that the crypto crisis, particularly when cryptocurrencies lost about two-thirds of their $3 trillion worth in 2022, is largely confined to the crypto sector. are doing.
Lapo Guadagnuolo, senior analyst at S&P Global Ratings, said connectivity between cryptocurrencies and the financial system remains “very limited.”
ETF issuers also say they have guardrails in place. For example, goods are redeemed for cash rather than Bitcoin, minimizing the number of intermediaries that physically hold virtual currency.
“We're not seeing dramatic changes in any of these products,” said Steve Kurtz, global head of asset management at Galaxy Digital, which has partnered with Invesco on ETFs.
Still, at least one SEC executive has expressed concerns.
When she voted against approving the ETF in January, SEC Commissioner Caroline Crenshaw said in a statement that the ETF was built on a tradition of “mainly allowing non-compliant crypto market crises to spill over.” He said the SEC has not considered whether it would create a bond with the market.
Crenshaw did not respond to requests for comment, but he also said he was concerned that ETFs could pave the way for riskier products.
“I fear that today we are setting ourselves up for failure tomorrow,” she added.
(Writing by Tommy Reggioli Wilkes; Reporting by Hannah Lang, Elizabeth Howcroft; Additional reporting by Saquib Ahmed, Chris Prentice, Douglas Gillison; Editing by Michelle Price, Anna Driver)
