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A little-known Brazilian wealth manager has come up with a novel solution that could allow it to beat much bigger competitors like BlackRock and Ark and gain approval for the first spot Bitcoin exchange-traded fund in the US.

Hashdex’ move seeks to allay the Securities and Exchange Commission’s concerns about the risk of manipulation in the spot bitcoin market.

While competing claimants like BlackRock are proposing to enter into a “monitoring-sharing agreement” with cryptocurrency exchange Coinbase to uncover potential fraud, Hashdex instead says its ETF’s net asset value calculation would be derived from the CME market’s bitcoin futures curve .

The New York Stock Exchange has filed with the SEC to allow Hashdex to convert its existing $3 million NYSE Arca-listed bitcoin futures (DEFI) ETF into a spot Hashdex bitcoin ETF.

Hashdex’ request comes amid mounting speculation that U.S. regulators will end their decades-long opposition to the creation of spot bitcoin ETFs — which invest in the “physical” cryptocurrency rather than futures contracts — since BlackRock, the world’s largest wealth manager , submitted an application to launch such an ETF in June.

BlackRock’s move sparked a 21st-century style gold rush as big-name competing managers including Ark Investment Management, Fidelity, Invesco, WisdomTree, VanEck, Valkyrie Investments and Bitwise re-filed their filings with the SEC in hopes that the Filing BlackRock’s IPO would open the regulator’s door.

The SEC is still reviewing the filings, leaving the industry in the dark about whether it will allow spot bitcoin ETFs, a structure it has objected to on the grounds that bitcoin is traded on unregulated exchanges that are potentially vulnerable to tampering or fraud.

However, if the SEC is willing to relent, it would mean all of these big names could yet be overtaken by Hashdex – a Brazilian cryptocurrency house that currently has just $435 million under management in Latin America, Europe and the US – less than 1/ 20,000ths of BlackRock’s $9.4 trillion in assets under management.

DEFI is currently by far the smallest of four U.S.-traded bitcoin futures ETFs, a structure the SEC has approved, as futures contracts are listed and traded on the Chicago Mercantile Exchange, a regulated market. The SEC believes this agreement provides sufficient oversight to avoid the risk of investors being harmed by criminal activity.

The Hashdex ETF would hold a mix of bitcoin futures contracts, spot bitcoin, and cash. It would buy and sell physical bitcoins through the CME’s Exchange for Physical Transactions, a type of private agreement between two parties to trade a futures position on the underlying asset. These transactions are subject to market surveillance by the CME.

Therefore, “any attempt to manipulate the fund’s price would require manipulation of the futures curve in the CME market,” a market that the SEC is happy to allow in order to regulate pricing for the existing quartet of bitcoin futures ETFs substantiate, according to the submission.

Nate Geraci, president of The ETF Store, a financial advisor, called the Hashdex/NYSE proposal a “brilliant move.”

A second factor critical to filing is that DEFI is structured under the Securities Act of 1933, rather than the Investment Act of 1940, which is favored by many ETFs, including competing bitcoin futures funds .

The regulated investment companies structured under the 1940 Act may only invest in securities, not commodities.

However, grantor trusts and commodity pools created under the 1933 Act are permitted to invest in commodities, which is why ETFs such as SPDR Gold Shares (GLD) are structured according to this format.

This is relevant because SEC Chairman Gary Gensler has stated that Bitcoin is a commodity and not a security — although he believes most other cryptocurrencies are securities.

If the SEC relents on spot bitcoin ETFs — or is forced to change course if it loses an ongoing lawsuit with Grayscale suing the regulator for the right to convert its existing Grayscale Bitcoin Trust (GBTC) into an ETF — could this be the case? It might give Hashdex an advantage due to its 1933 Act structure.

There is an opinion that it would be faster to convert an existing fund to start trading spot bitcoin than to launch a new vehicle from scratch.

“In the event that the SEC approves a spot bitcoin, DEFI can easily switch from futures to physical assets as its structure allows it to hold either futures or physical assets — like most commodity ETFs,” Cinthia said Murphy, director of research at ETF Think Tank, the research arm of Tidal Financial Group.

“Converting a 1933 statute requires filing some paperwork, but once approved, DEFI could switch to Spot the next day after SEC approval,” she added.

That option would not be available for other existing bitcoin futures ETFs like the ProShares Bitcoin Strategy ETF (BITO), Murphy said.

“[19]40 Act Funds cannot hold physical assets, only securities, therefore conversion is not possible. We will likely launch a number of spot Bitcoin Law 13 funds, as opposed to conversions of existing funds due to these regulatory restrictions associated with Law 40 funds.”

Being the first can prove advantageous. BITO, which launched rival products from VanEck, Valkyrie and the Hashdex ETF when it launched in October 2021, currently holds $942 million of the $1.01 billion in the segment.

In this case, however, investors could choose to wait for the launch of similar products from household names like BlackRock if they think they will follow soon.

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