Inside the Multi-Year Quest to Create a Bitcoin ETF

Tracy Alloway (0:08)

Hello, and welcome to another edition of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:13)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

So Joe, they say the best way to learn about something is to actually do it, right? Or the best way to understand something is to try to do it yourself.

Joe Weisenthal (0:26)

I have heard people say that, and I think that's definitely true. In my experience, you only get so much from reading about something or talking about something, and then you try to do it and you learn a ton. But why? Why do you bring this up?

Tracy Alloway (0:39)

Well, sometimes I think in finance and markets, we talk about complicated or sort of abstract topics. And the best way for people to learn about them would be if we went out and tried our hands at them ourselves.

But given it's finance and markets, that's difficult and or in some cases illegal.

Joe Weisenthal (0:58)

So you're saying we're not going to do an episode where we go out and launch a trading operation or anything like that?

Tracy Alloway (1:05)

No, we're not. But we're going to do the next best thing. Which is we're going to have a guest come on and talk about his specific experience trying to set up a Bitcoin exchange traded fund.

Joe Weisenthal (1:17)

I am very excited about this, of course. This was a huge topic late last year. So many different companies rushing to try to be the first with a ETF that gave people direct exposure to Bitcoin.

It was fascinating to watch. It still hasn't happened yet. But that exact process, I agree, I think, is still shrouded in mystery for most people, how you go about it and what it actually takes to get there.

Tracy Alloway (1:43)

So the great thing about this conversation, in my opinion, it's not necessarily the emphasis on Bitcoin. It's the emphasis on the ETF structure and how you would apply that to a new type of asset. And I should also say, as a bonus, we have an extra guest on Odd Lots today.

That is Rachel Evans. She is our ETF guru for Bloomberg News. She covers all sorts of ETFs. She's going to be in on the conversation. And to begin with, before we bring on our main guest, she's going to help us lay out, well, the lay of the land, really, when it comes to ETFs.

So Rachel, let's start with you. Thank you so much for coming on.

Rachel Evans (2:28)

Thank you guys for having me.

Tracy Alloway (2:29)

So I guess the first question to you is, we talk about building a Bitcoin ETF. It's been a multi-year attempt.

Why has it been so difficult?

Rachel Evans (2:39)

So with Bitcoin ETFs, I mean, it basically takes us back to what it takes to create a successful exchange trade of fund. First up, of course, you need to have a great idea. Now with Bitcoin, people feel like they have a great idea. But the next step in that process is trying to get approval from the Securities and Exchange Commission, the regulator for ETFs, to actually be able to launch that fund. Now, the SEC has really been dragging its feet a little bit on this for market participants anyway, because they have some serious concerns about how Bitcoin would operate within an exchange trade of fund.

Now, what this kind of comes down to in essence is really kind of the back office operations of an exchange trade of fund.

To make an ETF actually work, there are three key aspects that you need to have in place. The first is kind of the fairly sort of vanilla back office type arrangements. This is kind of the custodian, the board that kind of monitors how the manager is actually doing and make sure that the ETF is on target. And that's something that I think on the custody side, they've kind of had concerns about. But the second and the third kind of pillars are really kind of where the SEC has actually had issues. That's kind of on the authorized participants side of things, which sounds a lot like jargon, right? And it is, but basically the authorized participant is the gatekeeper for ETFs. They are pretty much the most important person when it comes to making an exchange trade of fund work. What they do is that when you decide to buy an ETF, you give your cash to your broker via any of the many online platforms that you have. That cash then wends its way through to the hands of an authorized participant, who is the one that actually goes out and buys the stock or the bonds or the commodity that then gets put into the fund and the fund manager will then manage. The same process happens on the way out, that the fund is going to give you your money back. The securities goes to the authorized participant who then sells those securities in the market and gives you your money back. So basically, they are the middleman. And the SEC is a little bit concerned about how that might work with Bitcoin.