The Bitcoin ETF Tipping Problem
February 6, 2024·12 comments·In Brief
Bitcoin just entered the traditional financial system through structures designed for gold. But gold doesn't get donations. Gold doesn't have NFTs embedded in it. What happens when crypto's native weirdness meets finance's byzantine rulebook?
• Someone sent Bitcoin directly to a public ETF wallet address, and nobody knew exactly what to do with it. The structure works, but only because 30 years of legal refinement built answers into a system designed for something completely different.
• The edge cases pile up immediately. Ordinals (NFTs literally embedded in Bitcoin), unsolicited donations, potentially sanctioned assets all created questions that the prospectus never imagined, and that traditional custody arrangements weren't built to handle.
• The legal system has answers, but they're strange ones. Donations become miscellaneous investment income. Embedded ordinals get stripped of their non-Bitcoin value. The system treats crypto's native features as noise to be processed, not innovations to be understood.
• This exposes something structural about modern finance. The rules governing how this works are not laws of nature. They're social constructs built over decades, and they're being stress-tested in real time by technology that doesn't fit the original categories.
• The real question isn't whether the ETF survives this. It's whether these collisions between crypto and traditional finance reveal how both systems actually work, and what happens when technology evolves faster than the legal frameworks built to contain it.
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Comments
Long time listener first time caller. Happy to entertain any questions!
UK and EU brokers are not permitted to retail ETF shares. The reason cited is lack of KID provision. Looks like market protectionism to me, as the degree of transparency and research is an individual investor’s preference.
Not sure what you mean? UCITS ETFs are a big deal in the UK/EU for retail? I believe, for example, that every iShares UCITS ETF in the UK has a KIID document and is available at most brokers?
And HL, the biggest broker trades thousands of different ETFs I believe?
I’m sure you’re making a different point though? Are you saying it’s hard for them to sell you US listed ETFs? Or that you can’t buy local Jersey/German/Swiss BTC ETPs at your broker because they aren’t UCITS compliant (that’s true)?
My UK broker (a subsidiary of a G-SIB) would not let me buy US ETFs when I tried, in around September last year.
The EU broker that I use has messaged me recently that ETF trades can no longer be opened on their platform.
The UK broker did say that they can buy them for a managed account, but this doesn’t apply to execution only accounts. One of the funds that they would not buy for me (citing “regulatory restrictions”) is an iShares ETF from Blackrock.
Got it - yes, US listed product is a pariah in much of the rest of the world (I could go on about the reasons, good and bad) Can you buy ordinaries in Germany, Switzerland or Jersey? There are Bitcoin funds (non-UCITS) from those three jurisdictions available … no idea on the retail side though.
In the UK we face the additional issue of the FCA having banned the sale of "cryptocurrency-related “derivatives” (incl ETFs) to retail investors. Which puts investment managers like me in the awkward position of having to avoid the topic entirely with all my clients. Including the ones that already hold Bitcoin directly themselves, via one of the many self-custody options.
So the problem is layered. There is the US ETF restriction, but in addition the ban on “cryptocurrency-related derivatives”. The whole thing is a giant paradox, as it is creating a parallel system, where people with a early interest in Bitcoin are being forced to proceed without any advice or custody options, out with self-custody. Personally, I believe that self-custody of the actual Bitcoin is the best way to go, but the FCA seems to have created a situation doing the opposite of their intention…
It is a strange world.
Germany and Switzerland, yes.
The Bailiwick of Jersey does not have a market that I can see, although it is a UK sovereign dependency.
The “no more expanding trades” message includes structured products.
The closest I came to holding a bitcoin ETF was putting one on my watchlist.
If it was easy to hold, I would have a small holding of some description.
Helpful thanks – Didn’t know how the FCA restrictions landed on retail in terms of other jurisdictions. Interesting!
I get why people are excited about the Bitcoin ETF, although as someone who’s been in the space since 2014 I am not. I had hoped that crypto regulation would have caught up by now in some way that would have made interacting with DeFi more legally plausible (and building DeFi platforms, which is a nightmare from my experience). Seeing “donations” go to a public address held by a regulated ETF is pretty funny though as this same thing could happen in DeFi and in essence those funds could be stranded as well.
Great analysis - learned a lot. Thank you!
Would the ordinals hypothetically come back out someday on a redemption? Like a message in a bottle?!
Was searching a bit for my own answer and found this funny nugget as an aside.
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