Custodia Bank CEO Caitlin Long has raised concerns about a “hidden risk” associated with the imminent launch of several Bitcoin ETFs in the United States, following BlackRock’s recent update to its S-1 filing. Long suggests that sponsors may seek to increase their profits through securities lending, a practice that could expose investors to hidden risks.
Long’s concerns have been amplified by what appears to be a race to the bottom in terms of management fees among Bitcoin ETF applicants. These applicants are supposed to make a profit by taking a yearly percentage of their investors’ Bitcoin. BlackRock’s updated prospectus revealed a management fee of just 0.3%, while competitors such as VanEck and Bitwise announced even lower fees of 0.25% and 0.24% respectively. These figures have surprised analysts who have been predicting a fee war for months.
Securities lending involves temporarily transferring shares or bonds to a borrower, who provides other assets as collateral and pays a borrowing fee to the lender. This practice is often used in short selling, hedging, and arbitrage strategies. Long points out that securities lending has become increasingly popular in the fund management business over the past 15 years as a way to generate profit beyond mere fees. In the context of an ETF, this would not include lending of the fund’s underlying Bitcoin itself, which would be illegal for any grantor trust.
According to Eric Balchunas, a Bloomberg ETF analyst, ETFs registered under the Investment Company Act of 1940 can lend out up to 33% of their holdings, and they typically put 70% or more of the profit back into the ETF. Long argues that such lending creates potential hidden risks for investors, with little disclosure about how cash proceeds from lending are reinvested.
Many analysts expect the SEC to approve applicants’ 19b-4 applications by January 10, which is the deadline for the Ark Invest/21Shares ETF to be approved. In response to Long’s concerns, Hany Rashwan, CEO of 21Shares’ parent company 21.co, clarified that their application explicitly rules out the use of securities lending in its business model. The filing states that the Trust, the Sponsor, and the service providers will not loan or pledge the Trust’s assets, nor will the Trust’s assets serve as collateral for any loan or similar arrangement.
Contrary to Long’s view, CoinMetrics co-founder Nic Carter interprets the low fee arrangements of ETF sponsors as an indication that they are expecting massive inflows to their products. On Monday, Bitcoin reached a twenty-two-month high of $47,100.
This News Article was automatically generated by Bob the Bot (AI)
| Information | Details |
|---|---|
| Geography | North America |
| Countries | 🇺🇸 |
| Sentiment | neutral |
| Relevance Score | 1 |
| People | Caitlin Long, Nic Carter, Hany Rashwan, Eric Balchunas |
| Companies | Bitwise, BlackRock, Binance Futures, CoinMetrics, Custodia Bank, 21Shares, VanEck |
| Currencies | Bitcoin |
| Securities | None |
