After years of eager anticipation and countless rejections, the United States Securities and Exchange Commission has finally given the green light to a series of spot Bitcoin exchange-traded funds (ETFs) for trading on American stock exchanges. These ETFs closely track the price of Bitcoin by directly purchasing and holding the cryptocurrency. Unlike the previously available Bitcoin futures ETFs, which only track the performance of Bitcoin futures contracts, these newly approved spot ETFs actually hold real Bitcoin. This approval provides institutional and retail investors with a regulated and convenient way to gain exposure to Bitcoin without the complexities of buying and storing it themselves. These ETFs are subject to SEC oversight and adhere to the same rules and regulations as other investment funds and providers.
However, the question remains: what does this mean for the possibility of a Bitcoin ETF in Europe? Are European financial regulators prepared to follow suit, or will European investors have to wait longer? Accessing Bitcoin and other cryptocurrencies in Europe is currently a relatively complex process for investors. While retail trading and investment platforms such as Bison, Bitpanda, and eToro offer convenient entry points, they may not be suitable for larger investors or those seeking more traditional investment structures.
The Undertakings for Collective Investment in Transferable Securities (UCITS) regulation in Europe presents a hurdle for ETFs that exclusively invest in Bitcoin. According to this regulation, ETFs cannot be approved if they invest solely in one asset, as the goal is to protect investors from significant financial losses. European fund products are required to be diversified and not overly concentrated in a single asset class or product. As a result, investors in EU countries who want to participate in the crypto market must rely on alternative products.
One such alternative in Europe is Bitcoin exchange-traded notes (ETNs), which fall under the category of exchange-traded products (ETPs) and are often backed by physical Bitcoin. Several European investment companies, including 21Shares, VanEck, ETC Group, and Deutsche Digital Assets (DDA), offer these alternative investments in the form of ETNs. Dominik Poiger, the chief product officer of Deutsche Digital Assets GmbH, highlights that one advantage of ETNs is their tradability on exchanges like Deutsche Börse’s Xetra, Euronext Amsterdam, or SIX Swiss Exchange. Investors are already familiar with the concept of exchange-traded products, and these ETNs can be easily used for portfolio diversification.
However, from a legal standpoint, ETNs do not have the same level of protection as ETFs. In the event of an issuer’s insolvency, customer funds may not be separated from the bankruptcy estate. To address this concern, several providers have implemented additional security measures, such as using regulated crypto custodians, independent security trustees, and internal governance mechanisms.
Ophelia Snyder, the co-founder and president of 21Share, argues that the differences between ETFs and ETNs are largely irrelevant if the product structure, such as spot price and physical collateralization, is appropriate. For example, 21Shares’ ETP reduces the potential default risk of the issuer by depositing collateralized assets with an independent custodian. This investment vehicle compensates for the advantage of an ETF, which protects investor capital from the issuer’s creditors in the event of insolvency.
European investors can easily buy and sell crypto-asset ETNs on regulated stock exchanges at the current market price, similar to their experience with shares or ETFs. Institutional investors may also have access to special Alternative Investment Funds (AIFs) offered by certain financial institutions. These funds are not regulated at the EU level by the UCITS Directive and can directly invest in cryptocurrencies.
Will Bitcoin ETFs be approved in the EU in the future? Poiger believes that the EU will not approve Bitcoin ETFs in their current single-asset form, as crypto-assets are not eligible under the UCITS regulation. However, if recognized crypto indexes that meet UCITS requirements are established, an ETF based on a crypto index with several cryptocurrencies could be possible. This would not require regulatory changes and would allow retail clients to invest in cryptocurrencies in a diversified way while staying within their existing custody structures.
Europe is already ahead of the United States in offering regulated access to crypto through ETNs and ETFs. There are numerous options for investing in Bitcoin and other cryptocurrencies in Europe, including indexes, single asset products, liquid staking products, and shorts, all fully backed by physical spot crypto assets. These products are listed on exchanges such as SIX and Xetra in multiple currencies. The demand for cryptocurrencies in Europe remains high as investors recognize the value and opportunities in this asset class.