In this issue
- Bitcoin’s ETF debut: Great expectations
- Facebook’s metaverse dreams: Journey to the East
- China’s crypto traders: Being water
From the Editor’s Desk
This week began with a bang for the cryptocurrency industry. Although it may not have been the Big Bang that many had been hoping for, the unveiling of the first iteration of a Bitcoin futures exchange-traded fund in the U.S. was nonetheless a milestone for the sector, an affirmation of BTC’s maturity as an asset and its acceptance by the mainstream finance sector.
In a sign of the high degree of caution with which the U.S. Securities and Exchange Commission has approached cryptocurrency ETFs — which have already been approved in jurisdictions such as Canada and the European Union — it gave the thumbs-up only to a Bitcoin futures fund trading index-based derivatives, not an ETF based on spot prices, which would have had to hold BTC.
It was an adroit move by the SEC, keeping mom-and-pop investors out of harm’s way while giving professional traders a way into the action — and risks.
And it came as the “carrot” side of regulatory action while New York’s Attorney General wielded the stick, shuttering two of the biggest crypto lending companies in that state due to alleged violations related to their registration.
As the two firms — widely reported to be Nexo and Celsius — took the rap, investors were more responsive to the carrot than the stick, sending Bitcoin to its highest level in six months.
It turns out that positive reinforcement is something we here at Forkast.News can also sign up to. This Friday, we’re holding a special in-person event, Decentralized Hong Kong, at which you can network and enjoy free dApps (drinks and appetizers).
Our first Forkast IRL (In Real Life) speed-networking event in Hong Kong kicks off in the early evening on Oct. 22. Expect to meet ConsenSys Managing Director for Asia-Pacific Charles d’Haussy, Hashkey Senior Board Advisor and former HKEX compliance chief Angelina Kwan, and other leading lights from Hong Kong’s blockchain scene.
Space is limited, so sign up early to ensure you don’t miss out. Details are here.
Until the next time,
Founder and Editor-in-Chief
1. Bitcoin hits the bourse
By the numbers: BITO — over 5,000% increase in Google search volume.
The U.S.’s first Bitcoin-related exchange-traded fund debuted on the New York Stock Exchange on Tuesday, marking a major milestone for the crypto industry. Trading under the ticker BITO, the The ProShares Bitcoin Strategy ETF opened its first day of trading at US$40.88 and closed at $41.94, up 2.59%, according to Reuters. Bitcoin was trading at US$64,087 at press time, just around US$700 shy of its April all-time high.
- The Bitcoin futures-based ETF, unlike a Bitcoin ETF based on spot trading, tracks a bundle of contracts linked to the future price of Bitcoin. ProShares, a supplier of exchange-traded products that offers the new ETF, made clear on its website that the fund “will invest primarily in Bitcoin futures contracts and does not directly invest in Bitcoin.”
- U.S. Securities and Exchange Commission Chair Gary Gensler has said in the past that he would prefer to see funds holding Bitcoin futures rather than the cryptocurrency itself.
- Nonetheless, the new futures-based ETF is a milestone that could have a transformative effect on the trading of Bitcoin, Ethereum and other cryptocurrency. It permits arbitrage, hedging and shorting because ETFs attract capital from financial advisers and other mainstream finance sector businesses that seek regulated instruments in their portfolios. For investors, the fact that ETFs are regulated provides more security than purchasing Bitcoin on a crypto exchange.
Forkast.Insights | What does it mean?
The SEC’s decision to allow a futures-based ETF but not (yet) a spot-price fund is attributable to risk. The regulator has been rejecting requests for ETFs since as far back as 2013. It’s given ProShares a pass because it filed its ETF under the Investment Company Act of 1940, which SEC Chair Gensler has said helps provide “significant” protection for investors.
That gives the Commodity Futures Trading Commission the power to regulate the ETF in much the same way it does any other ETF. It also means funds won’t have to physically hold Bitcoin, because they are trading derivatives linked to index prices, as opposed to the currency itself. That makes them less of a target for hackers looking for easy pickings. The fees and rolling contracts involved in derivatives trading will also keep out the vast majority of retail investors.
A futures ETF has additional expenses because derivatives contracts expire, meaning that funds investing in them are forced to repurchase contracts to maintain their exposure. That can eat into their profits.
The Horizon Bitcoin Front Month Rolling Futures Index, a metric that includes the cost of rolling forward contracts, has returned around 530% in profit over the past two years, a period during which Bitcoin itself has gained 660%.
The heady cocktail of regulation, relatively lower risk and higher costs has made Bitcoin futures appealing to the SEC. We’ll have to wait and see if it’s everyone else’s cup of tea.
2. Facebook’s parallel reality
By the numbers: Facebook hiring — over 5,000% increase in Google search volume.
Facebook has announced that it plans to create 10,000 “high-skilled” jobs in the European Union over the next five years as a part of the vision to reinvent itself as a metaverse company.
- “No one company will own and operate the metaverse.” Facebook said in its announcement. “Like the internet, its key feature will be its openness and interoperability. Bringing this to life will take collaboration and cooperation across companies, developers, creators and policymakers.”
- Facebook said the E.U. had “an important role to play in shaping the new rules of the internet”. It expects to see the completion of E.U.’s Digital Single Market, as well as stability in international data flows, and is focusing its recruitment drive on France, Germany, Ireland, Italy, the Netherlands, Poland and Spain.
- Facebook also launched the Novi wallet for its Diem stablecoin project, prompting five U.S. senators to call for an immediate halt to the project.
Forkast.Insights | What does it mean?
Facebook is trying to play nice with Europe. The E.U. has been fining Facebook and its subsidiaries for years — 110 million euros (US$128 million) for providing misleading information on its takeover of instant messaging service WhatsApp and US$270 million for data violations, to name two penalties — and the company has salted away hundreds of millions of euros to pay various fines for privacy breaches.
The offer to bring jobs and technology to the E.U. is a small olive branch for European regulators. It’s also not the first attempt Facebook has made to insert itself into the Web 3.0 world.
Libra (Diem), Facebook’s now-mothballed digital currency was met with hostility from the outset by both European and American regulators. No one was particularly keen on the world’s biggest social media platform controlling its own private currency.
But Facebook’s latest gambit will present the E.U. with some food for thought. The metaverse is growing quickly and is dominated by projects outside of Europe’s borders. Axie Infinity, Decentraland and Enjin Coin — three of the biggest metaverse projects — are based in Asia or the U.S. Europe is likely to need to foster its own indigenous versions, or face cozying up to its old enemy.
3. China’s unstoppable crypto traders
China may have unleashed the mother of all crackdowns on the cryptocurrency industry, but some in the beleaguered sector are finding new ways to remain in business.
- As increasing numbers of cryptocurrency exchanges announce a halt to the registration of China-based users and close existing users’ accounts, some Chinese crypto investors are registering companies outside of the country in order to skirt know-your-customer checks, potentially allowing them to trade crypto as corporations, according to a report by Beijing Business Today.
- The development has opened up business opportunities for intermediaries, with a number of vendors on Taobao, a gigantic e-commerce marketplace, seizing the opportunity to provide such services.
- A customer service representative at one vendor told Forkast.News that some of its clients had successfully made crypto investments using overseas company registrations.
- The vendor said it could offer crypto investors company registrations in the British Virgin Islands, the Marshall Islands and the U.K., with fees ranging from 1,800 yuan (US$280) to 7,880 yuan. It said registrations in the British Virgin Islands and the U.K. took only 5-7 working days to complete, and that those in the Marshall Islands took 8-10 working days.
- Most cryptocurrency exchanges contacted by Forkast.News did not respond to enquiries about their response to the growth of such services for China-based crypto investors, although OKEx Director Lennix Lai replied in an emailed that the company had put in place stringent KYC processes to ensure compliance and that it would refuse services to parties that did not abide by its terms of service.
Forkast.Insights | What does it mean?
Residents of China have been circumventing the country’s Great Firewall for years, using virtual private networks to surf the internet away from the prying eyes of the state, despite authorities’ repeated attempts to banish such services. The fact that China-based cryptocurrency investors are finding ways to continue investing in crypto despite the sweeping crackdown is simply another manifestation of the same determination to get around official surveillance and meddling.
As fast as the authorities shut services down, new ones seem to open up. This regulatory whack-a-mole will likely continue. Despite the increasing reach of the state into all areas of life in China, there are signs of dissatisfaction with the autocratic leadership of Xi Jinping, and members of China’s middle class may be becoming less willing to toe the line, at least when restrictions encroach upon the ways in which they can make money.
China maintains strict controls over where individuals can put their cash. For years the authorities encouraged investment in the country’s domestic property market, inflating a bubble that has led to the effective collapse of giant property developer Evergrande. That has spooked domestic investors, who are looking for alternatives. As crypto markets boom, the middlemen are more than happy to help mainland Chinese find them.