Protocol | Fintech
The people, power and politics of fintech, every Tuesday and Friday.
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A bitcoin ETF is finally here. Sort of.

The bitcoin symbol in orange in front of a photo of the New York Stock Exchange

Hello and welcome to Protocol | Fintech! This Tuesday: a bitcoin futures ETF, the SEC's GameStop report, and Square's bitcoin mining plans.

America's first bitcoin ETF. Kind of.

A bitcoin ETF is finally here, even if it's not what purists want.

First, some details: It's the bitcoin futures ETF from ProShares, and it's called Bitcoin Strategy ETF.

  • The ETF doesn't hold bitcoin directly, like a typical ETF holds underlying assets. Instead, it will hold bitcoin futures contracts.
  • The fund will trade on the NYSE today, according to an updated prospectus filed Monday, under the ticker BITO.

People have been waiting a long time for a bitcoin ETF. "Crypto ETFs are another step towards truly mainstream adoption and integration of crypto into our economy," said Tom Loverro, general partner at IVP, which has invested in Coinbase.

  • Large investment firms have already been bidding up the price of bitcoin futures in anticipation of the ETF being approved.
  • Several other firms such as Valkyrie and VanEck have their own bitcoin futures ETFs waiting to be approved to start trading as well. There are reportedly more than 30 applications pending. Invesco announced Monday it was canceling plans for a bitcoin futures ETF.
  • A number of firms have long sought approval for a true bitcoin ETF that holds the currency. The first was the Winklevoss twins' proposal in 2013. But the SEC has not relented, concerned that bitcoin investors could be the victims of manipulation, liquidity problems, wild volatility or custody issues (With the ProShares product, the SEC doesn't have to formally approve it, it just has to allow the product to start trading.)
  • There are already bitcoin ETF products in other countries such as Canada. There are also pooled investment trusts such as Grayscale's $37 billion vehicle.

And the SEC is (more) comfortable with this bitcoin futures ETF than with one that actually holds bitcoin. Commission Chair Gary Gensler indicated in August that he considers the idea safer, with more investor protections, than the alternative.

  • These sorts of futures products track the price of futures contracts, and give exposure to a commodity, without requiring ownership of the underlying asset. And such futures are traded on regulated markets such as the Chicago Mercantile Exchange.
  • Still, last week the SEC tweeted a warning to investors that was seen as foreshadowing the ProShares trading, and included a link to its investor bulletin: "Before investing in a fund that holds Bitcoin futures contracts, make sure you carefully weigh the potential risks and benefits."

But it's very much Buyer Beware. Retail investors don't have the sophistication to take full advantage of futures ETFs, analysts say.

  • Investors who buy a futures ETF are not getting the same investment as a more traditional ETF that holds the underlying asset. Futures themselves are typically used more by large investment firms for sophisticated investment strategies.
  • Futures ETFs can differ from the performance of the underlying assets they track. Futures ETFs could lag the performance of bitcoin due to a phenomenon known as contango.
  • Futures contracts also expire every month, and have to be repurchased, which can add costs to a product.
  • "It is perhaps shortsighted of the SEC to really lean into futures-based products and not spot," said Grayscale CEO Michael Sonnenshein, who wants to convert Grayscale's bitcoin trust into an ETF.

Still, it's good news for bitcoin. Investors and analysts believe the ProShares ETF and more that come later could draw more attention and interest to bitcoin specifically and crypto generally. And the very existence of the new bitcoin ETF is generating speculation that an actual bitcoin ETF based on spot prices could eventually be approved.

A MESSAGE FROM APEX FINTECH SOLUTIONS

Effecting and making trades doesn't just happen automatically. To withstand the rigor and speed of the retail investor revolution, you need a strong technological backbone to power the market. Apex Fintech Solutions is a leader in the fintech space, providing the infrastructure upon which some of the world's top digital trading platforms operate.

Learn more

Protocol Event

Global payments: challenge and opportunity

Business is more global than ever, but cross-border payments remain mired in older systems. Can new technologies leapfrog the past? At an event on Oct. 20 at 10 a.m. PT, Protocol | Fintech will bring together experts in consumer and business payments to discuss the challenges and opportunities ahead. RSVP here.

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NY's attorney general is investigating crypto lending platforms. Two unnamed companies have been ordered to cease and desist operations for residents of New York. Three other companies have been ordered to provide information.

Overheard

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"If you look at our footprint today, it's much more distributed and, in five to 10 years, it will be even more distributed. We'll have many more people in other cities in the United States and other cities across Europe and Asia and will be less concentrated."Goldman Sachs Chief Operating Officer John Waldron on the pandemic's impact on the Wall Street giant.

3 Questions With …

John Swigart, CEO, Pie Insurance

What fintech trend are you most excited about?

I am most excited by companies that are opening up possibilities for small businesses to thrive. It's been exciting to witness the rapid creation and adoption of technologies like mobile payments and simple accounting and banking solutions. By digitizing the entire way small businesses operate, they are able to be more flexible, save money and focus on what they love doing most, building their businesses.

What problem would you like to see a fintech company solve?

I would like more fintech companies to build products that positively impact groups that are underserved, whether that's health insurtech companies building products that make it easier for underserved and minority communities to access care or fintech solutions that help small businesses become more efficient and therefore more profitable. I want to see businesses become more focused on building highly successful, technologically advanced companies that also do important and good things for the world around them.

What was your first tech or fintech job?

At the time we didn't call it "fintech" or "insurtech," but I was the vice president of finance and then chief marketing officer of Esurance. We were completely reinventing how people could access auto insurance through an easy-to-use, online experience. After my 13-year tenure at Esurance, I saw the impact that technology made on the personal lines side of insurance. This ultimately led me to take that tech experience and build a company that would do the same, if not more, for commercial insurance.

Need to Know

Klarna is making key changes amid U.K. regulatory scrutiny. The buy now, pay later company will start implementing stronger credit checks and add clearer language to let users know that they are taking out a loan and they may be penalized for missing a payment.

The SEC released its much-awaited report on GameStop. The regulator said the GameStop trading frenzy in January "tested the capacity of our markets" and laid out key areas that merit further investigation.

Square may develop a clean-energy bitcoin mining system. CEO Jack Dorsey said the system, if it happens, would be "based on custom silicon and open source for individuals and businesses worldwide."

Making Moves

Nik Storonsky set up a family office in London. The Revolut founder created Storonsky Family Ltd. to handle his $7 billion fortune.

Deal Flow

Juni raised $52 million. The U.K.-based ecommerce software company's Series A round was led by EQT Ventures.

Deel raised $425 million. The payroll and management software company's Series D round was led by Coatue. The company is now valued at $5.5 billion.

Zopa raised $300 million. The U.K.-based neobank's funding round was led by SoftBank Vision Fund 2.

Data Point

More than $54 trillion

Projected transaction value of B2B domestic payments in 2023, up from $49 trillion in 2021, according to Juniper Research.

A MESSAGE FROM APEX FINTECH SOLUTIONS

It's that adaptability that keeps clients loyal to Apex, and helps them grow in the highly competitive and turbulent world of democratized finance. As of June 2021, 11 million of Apex's customers were aged 18-40 — but as others start to see the potential in this new and growing space, they're starting to jump in.

Learn more

Thanks for reading — see you Friday.
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