Previously, we’ve noted how difficult it’s been for exchange traded fund (ETF) providers to clear the US regulatory bar in order to launch a Bitcoin ETF—or for that matter any other cryptocurrency ETF as well. Indeed, to date, the only fund that’s specifically focused on the most popular cryptocurrency is Grayscale’s Bitcoin Investment Trust (OTC:GBTC) which isn’t traded on a major US exchange, but rather over the counter.

However, that doesn’t mean investment management firms have given up on the concept, or conceded listing on a major US index. Last Wednesday, asset manager VanEck Securities, in partnership with blockchain firm SolidX Partners, submitted a proposal to the US’s Securities and Exchange Commission (SEC) to bring to market a physically backed Bitcoin ETF that would be called the VanEck SolidX Bitcoin Trust, ticker XBTC.

Both companies have each previously tried to start BTC-focused funds: SolidX applied to start a physical Bitcoin ETF but the application was rejected by the SEC in early 2017; VanEck withdrew its plan for a futures and fund-backed Bitcoin ETF in January, ahead of an SEC final decision.

What could make this ETF acceptable to the SEC is that it would be backed by actual Bitcoins rather than by more speculative futures. SolidX’s CEO Dan Gallancy points out that:

“Last year, the SEC rejected our application…The main context behind that rejection was the fact that they had concerns about market structure and the potential for price manipulation in the underlying bitcoin market.”

However, he says, in this iteration the ETF will be supported by an index:

“What the folks at VanEck have done, through their index division, is put together an index of over-the-counter bitcoin trading desks. This is not electronic trading, this is voice trading, and therefore, inherently, less susceptible to the type of tomfoolery that the SEC was concerned with.”

Proposal Cautiously Welcome, But Concerns Persist

Shane Brett, CEO of GECKO Governance, says the proposal should be “cautiously welcomed” since it shows that Bitcoin, as well as other cryptocurrencies more broadly are being viewed as a legitimate investment option for fund managers. But he points out that the price of entry for this fund is surprisingly prohibitive.

“One of the benefits of trading in this fashion is that investors are shielded from the risks of sourcing and holding Bitcoin itself. This particular proposal for a Bitcoin-backed ETF, however, puts the investment opportunity outside of the range of the average retail investor as the share price is listed as being equal to 25 BTC, or approximately $200,000.”

Gary Bernstein, founder and CEO of CoTrader believes ETFs provide great investment solutions across multiple asset classes (including cryptocurrencies). But there are some concerns which need to be addressed. In Bernstein’s view, ETFs may not be the best way to individuals to invest in Bitcoin. There are a number of risk factors that should be taken into account with a physically backed Bitcoin ETF.

“Tracking error describe the deviations in a fund’s investment performance from the index that it tracks. Given the volatility of Bitcoin, its transaction and trading costs, not to mention management fees, at the end of the day returns can be very different from the underlying asset. We can see the same tendency with the Bitcoin Tracker ETN listed on the Stockholm Exchange (the closest thing right now to a Bitcoin ETF). The yield difference between the ETN and Bitcoin is more than 7% year-to-date!

On the other hand, for retail and individual investors who want to avoid the trouble of learning how the crypto world works and invest directly, it is a great way to gain exposure in Bitcoin while minimizing the risk.”

David Hanson, co-CEO of Ultra says that a Bitcoin ETF would be great news for the cryptocurrency and the entire digital coin space. It would legitimize and increase the volume and market cap of the first cryptocurrency in history.

“It opens the possibility for any institutional investor to include Bitcoin in their portfolio. Of course, first they’d need to be sure how the price tracking is done. It seems like VanEck and SolidX Partners want to use OTC deals, but [their fund is] correlated to BTC/USD from Coinbase and Bitfinex. That’s probably why US regulators are now looking at possible price manipulation by exchanges.”

Who Would Retain Custody of the Bitcoins?

Another, as yet unexplored issue is the question of custody. At the end of the day who will actually hold the tokens? Hanson says that Ledger, Gemini and Coinbase are each working to offer a solution, but ultimately there’s still no clarity on who will be in charge of moving the Bitcoin and storing it.

“That’s a tough question. ETFs could create one of the biggest bitcoin stakes. A Fort Knox of crypto needs to be established. Something that’s physically and digitally inviolable. An entity that would be aware of a coming threat such as Quantum technology.”

Hanson adds that protecting Bitcoin is technically doable but no doubt raises a lot of uncertainty among regulators. “Another more philosophical question emerges from this,” he says. “Bitcoin believers have all dreamed about mass adoption, but if it comes from centrally managed ETFs and institutional custodians, could it mean that the whole decentralization experiment has failed?”