Why Spot BTC ETFs Are Securities And Not..!!!
By Laxmikant Khanvilkar
Investor interest in the virtual digital assets (VDAs) or more popularly known as cryptocurrencies has gathered pace in the recent past over the optimism of several financial companies filing for spot Bitcoin (BTC) exchange traded funds (ETFs).
ETFs, the derivative products based on underlying assets (in this case Bitcoin), are often governed by securities regulation. But, its underlying assets….the Bitcoin’s status remain unclear…whether it is commodity or security….investors lack clarity on that front.
While, BTC faces dilemma over regulatory status, there is a need to understand what status the derivative product will have? We will try to disentangle the issue for you….
So let’s try to understand why BTC is not security, but spot BTC ETF is security.
The U.S. Securities and Exchange Commission (SEC) classifies a Bitcoin ETF (Exchange-Traded Fund) as a security because it meets the definition of a security under U.S. laws.
Here’s why SEC think ETFs to be a security:
There are three contours to SEC categorizing ETFs as securities.
The most basic being it involves “Investment of Money”. When you purchase shares in a Bitcoin ETF, you invest in a pool of assets — in this case, Bitcoin. You may not be buying Bitcoin directly, but your investment in funds results in creating an exposure into Bitcoin.
That means you are contributing to a common pool or a “Common Enterprise”, in this case an ETF fund. When an investor invests in a Bitcoin ETF, he or she don’t own the Bitcoin directly. Instead, the ETF creates a position in futures contracts based on the Bitcoin, while the investor own shares in the ETF. A futures contract is a standardized contract where two parties agree to exchange a specific quantity of assets on a specific day for a particular price. Thus, investor are pooling resources together with other investors into a common enterprise.
The pooling of fund is done with the “Expectation of Profits”. So, the basic idea of an investor to buy shares of a Bitcoin ETF, is to earn money. Hence, there is an expectation of making profit. The ability to fulfill this expectation is based on the efforts of others…in this case the management of the ETF….who safeguard the Bitcoin and track its price.
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