Canada has authorized Bitcoin-backed exchange traded funds (ETFs) for nearly a year. At least two brokers offer this product, including Purpose Investment’s Bitcoin ETF, which currently has about $1.6 billion (Canadian) in assets under management for the fund. (Brazil, too, now offers a Bitcoin ETF.)
The existence of Bitcoin ETFs might seem unremarkable but for the fact that, a year into the Biden Administration, US regulators have still not approved a straight-up Bitcoin-based ETF, despite repeated requests from would-be providers, from the Winklevoss twins to Fidelity. Last October, the Securities and Exchange Commission (SEC) approved the concept of an ETF built on Bitcoin futures contracts, and almost immediately ProShares began offering its Bitcoin Strategy ETF, although FIN feels sorry for anyone who bought it right out of the gate, given recent Bitcoin plunge:
Still, markets go up and down, and the broader point is that it’s increasingly ridiculous to parse the distinction between okaying an ETF based on Bitcoin futures contracts but not one tied to Bitcoin itself. On the fundamental investment issues—liquidity, custody, storage, valuation—FIN believes that the historic concerns raised by the SEC and others have been largely, maybe entirely, resolved.
Moreover, US regulators ought to welcome a Bitcoin ETF as part of a broader movement to create more price-signaling around Bitcoin, which at least in theory will help reduce volatility. FIN continues to believe that the US will ultimately approve a Bitcoin ETF, and later other cryptocurrency ETFs. As a glimpse into that future via a Canadian lens, FIN presents an edited exclusive interview conducted this week with Purpose Investment’s COO and Head of Product Vlad Tasevski.
FIN: How has the first year of the Bitcoin ETF gone?
Tasevski: I would say it has been a huge success for us, but even bigger than that, I think it’s been a real positive global phenomenon, giving real global access to many different types of investors to actually access this asset. Structurally it has performed extremely well. I think we have had zero operational issues whatsoever. If you take a step back we sort of put together a convergence of the traditional finance world with the crypto world, right?
We have seen an extremely diverse client base, from the average small investor, all the way to the world’s largest pension institutions. The ETF structure is proven, it’s extremely well suited to provide very easy and convenient access to specific assets.
FIN: You mentioned different types of people and institutions that are buying it. How many people roughly have bought the ETF, or how many transactions?
Tasevski: It’s probably in thousands, maybe even hundreds of thousands. One challenge with ETFs: We never know the end unit holders, we only know the brokerage firms which hold it on their behalf. I would estimate that probably we have at least 30 to 40%, if not higher, non-Canadian unit holders. A lot from US; at the same time, it’s still very challenging and difficult for the average US retail investor to actually buy this. And then also we have a really strong client base from South America, Asia and Europe as well—but also medium-to-large institutions. We had a client who bought this, it’s a US-based pension fund and they’re larger than the largest Canadian pension fund.
FIN: What in the first year has surprised you the most?
Tasevski: The speed of the actual asset accumulation in the first couple of weeks. We had a couple hundred million coming per day, at least for the first week or so. That showed that the actual depth of the market was there.
So that’s one thing. And then throughout the year, what we saw that was very surprising was—there was obviously the big dip [in the price of Bitcoin] in May and then in summer, and even now—we saw very minimal outflows if not, on some days, even positive inflows. Probably 97% of the days we have had positive inflows. We have seen a kind of long-term focus, at least for now. I mean, it might change. But so far we have seen that most of the investors have been very patient and they have not been rushing out of the door when prices have moved downwards.
FIN: Why is buying a Bitcoin ETF a better idea than just buying Bitcoin?
Tasevski: A few different ways. Number one, in some cases it’s just easier for somebody who is an investor to actually just use their existing brokerage account versus now having to open account elsewhere. In Canada, an additional benefit is that our ETF is eligible for tax-advantaged accounts. One is called TFSA. It stands for tax free saving account. Number three, which is not as obvious: when retail buyers buy directly on exchanges, they pay a large spread on the trading. We basically purchase at institutional rates.
Number four, there are still many, many individual crypto trading platforms which are still risky. There’s so many because it’s still unregulated in many parts of the world, even in US and Canada, there are still many smaller sort of so-called crypto firms, which offer the services, which are probably very high risk from a fraud and [know-your-customer] perspective.
FIN: How has the recent decline in the price of Bitcoin affected your business?
Tasevski: The total [assets under management] fund level is lower because the price is lower. Our net flows are positive. To give you an idea: In December, when we saw most of the pressure, I think like we sold probably like closer to hundred million of net inflows on that basis. And so far this month, we are in a positive territory as well in terms of net influx.
FIN: Do you expect the United States to approve a Bitcoin ETF similar to yours?
Tasevski: That’s a good question. My view is that ultimately the answer is yes, where I’m very uncertain is on the timeframe. Given the standing of the US globally, from every aspect, including in this case financial and monetary perspective, there are a lot of implications. From a US government perspective, I think they wanna make sure they properly understand the implication of this. Once Bitcoin is approved, I think it will have knock on effects on the other kinds of cryptocurrencies. They will probably wanna come with kind of broader, robust regulatory approach on the entire space.
Leaving Mexico to the Challengers
The most underplayed international business story this week was Citigroup’s announcement that it will pull out of the consumer banking business in Mexico. Viewed from so many angles, it’s a baffling move. That is to say:
- Citibank has one of the longest histories of doing business in Mexico of any foreign bank, going back to 1929. When the banking industry was nationalized in 1982, Citibank was one of very few foreign banks allowed to remain.
- Citibank’s branch network in Mexico was its largest in the world.
- At the beginning of this century, Citigroup seemed especially keen to expand its presence in Mexico, and as recently as 2016 said it would invest $1 billion in its Mexican unit.
- Crossborder transactions/remittances between the US and Mexico are among the biggest in the world, at more than $4 billion a month.
- Mexico’s middle class has expanded dramatically in recent decades. As The Economist noted last year: “Mexico is one of the five biggest markets globally for Uber, a ride-hailing firm. In April ikea, a Swedish furniture giant, opened its first store in the country.”
And yet, Citi’s abandonment of Mexico’s consumers also echoes a trend we’ve seen in recent years: to actually serve banking customers through physical branches costs a lot of money. Increasingly those customers are more cheaply (and often better) reached through a digital relationship, and Citi isn’t positioned to do that expertly in Mexico or many other markets. Citi has extricated itself from consumer banking in The Philippines, and announced similar plans for China, India, Russia, and several other countries. It’s also true that there have been gaps in the Mexican unit’s monitoring of money laundering, leading to expensive fines.
What’s striking—and telling—about Citi’s pullout is its stark contrast to the explosive growth of fintech and neobanks in Mexico. The country has a large underbanked population, approximately 40 million out of its 130 million. While traditional banks have viewed that population as a limit, many challengers see it as an opportunity. Local challengers such as Albo and Klar have raised tens of millions of dollars to offer innovative products to Mexican customers. Brazil’s Nubank has been especially keen to expand into Mexico, although it denied reports that it will buy Citibank’s Mexican business. The UK’s Revolut last year announced a US-Mexico “remittance corridor,” (although fintech writer Jason Mikula, who covered the announcement at the time, told FIN this week that he’s not sure that Revolut is yet even offering a product in Mexico). Clearly not all these efforts will succeed, but it is fascinating to watch the newcomers create trust in financial services that traditional banks were never able to achieve in Mexico.
This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.
