The world’s largest asset manager is uber-bullish on blockchain and its latest move shows. The US$10 trillion multinational behemoth has just launched a new blockchain-centric exchange-traded fund (ETF), designed to provide its European clients with exposure to the broader crypto ecosystem.
Blackrock Bullish on Blockchain
According to the firm, the iShares Blockchain Technology UCITS ETF (BLKC), which is listed on the Dutch exchange Euronext, is designed to track a technology-focused index – the NYSE FactSet Global Blockchain Technologies Capped index.
Importantly, the ETF is taking a picks-and-shovels approach rather than investing in any underlying cryptocurrencies themselves. It comprises 35 global companies with 75% exposure to companies whose primary business is related to blockchain, including miners and exchanges. The remaining 25% is exposed to companies who support the blockchain ecosystem through infrastructure – such as payments and semiconductor companies.
In its press release, Blackrock commented on the rise of decentralised payments and the notional US$1 trillion market capitalisation for digital assets, adding further that trading volumes had surged from US$10 billion in December 2017 to US$53 billion by August 2022.
‘We believe digital assets and blockchain technologies are going to become increasingly relevant for our clients as use cases develop in scope, scale and complexity”, said Omar Moufti, product strategist for thematic and sector ETFs at BlackRock.
This isn’t Blackrock’s first foray into blockchain and crypto, as US investors can already gain some exposure through its iShares Blockchain and Tech ETF. While it does provide direct exposure to crypto companies such as Coinbase and Galaxy Digital, it also counts PayPal and Nvidia among its top 10 holdings – suggesting that it is more ‘blockchain and blockchain-adjacent’ than anything else.
Earlier this year, the investment heavyweight also tied up a deal with Coinbase to provide institutional crypto custody services to its clients, offering additional evidence that this isn’t Blackrock’s first rodeo. And it won’t likely be the last. A recent filing suggests that Blackrock will soon launch a metaverse ETF.
Crypto ETFs – Not Widely Embraced Yet
Blackrock has clearly opted to launch ETF products that don’t provide exposure to digital assets, but rather, the surrounding ecosystem and blockchain companies. While that approach may be justified on the grounds of investing in infrastructure and not selecting specific winners and losers, it’s more plausible that the decision is based on regulatory concerns.
To date, the Securities and Exchange Commission (SEC) has denied every application for an ETF that provides exposure to the spot price of either Bitcoin or Ethereum. In the meantime, it has approved a number of ETF products that provide exposure to Bitcoin futures, including an ETF that allows investors to go short (or bet against) Bitcoin. Still, the elusive US-based spot ETF remains outstanding and according to Forbes, over 25 Bitcoin ETFs currently await SEC approval.
While some firms have communicated an intention to continue working “closely with the SEC”, others such as the Grayscale Bitcoin Trust have taken a more adverial approach. It kicked legal proceedings against the SEC earlier this year when its fund’s application to convert to a spot-based Bitcoin ETF was rejected.
Thus far, the primary reason given for the ongoing rejection of crypto spot-based ETFs is “market manipulation”. In this case, the SEC isn’t convinced that the trading volumes of crypto exchanges are accurate. In addition, the SEC has also cited the lack of a surveillance-sharing agreement between a “regulated market of significant size” and a regulated exchange.
In response, critics have slammed the SEC for being hypocritical and applying a different standard to crypto. They argue that market manipulation is an already well-established practice in traditional markets. As recently as this year, Wall Street investment bank JPMorgan Chase was fined US$920 million for its role in manipulating the precious metals markets for years – a ‘cost of doing business’ as some have described it.
However not all jurisdictions have been hostile to spot-based crypto ETFs. Europeans have a feast of options to choose from when it comes to crypto ETFs, as well as Canada which boasts 17 spot-based crypto ETFs. Even Brazil has approved a Bitcoin ETF.
Australia Beats US to the Punch
Closer to home in Australia, two ETFs were launched in May of this year to provide investors exposure to spot-based Bitcoin and Ethereum.
A second Bitcoin ETF listed just days later. Unfortunately for all ETFs concerned, they were launched as Crypto Winter set in, leading many investors to look for less risky alternatives. Disappointingly, the first day’s trading for Australia’s crypto ETFs combined saw just A$1.3 million in volume. Notably, all three were listed on Australia’s secondary exchange, the Cboe.
To date, there isn’t a crypto ETF listed on the ASX and it is believed that the front runner is local asset manager Monochrome Asset Management. It has opted for a more cautious approach and according to its website, its Bitcoin ETF is “coming soon to the ASX”.
An ETF is a familiar investment product and is widely seen as a vehicle for potentially contributing towards even greater levels of crypto adoption. Not all regulators have embraced it with open arms — most prominently the biggest capital market on earth, the US. As regulators grapple to get their heads around the complexities of digital assets, differing approaches are expected.
As long as the situation persists in the US, it’s possible we will continue to see more ‘blockchain ancillary’ financial products come on stream – such as Blackrock’s latest blockchain ETF. That is likely to remain the case until US investors are able to enjoy exposure through a spot-based crypto ETF.