Analysis: Would the Coinbase-BlackRock ETF Be the Industry’s ‘Magic Bullet’?

The excitement around the anticipation of the approval of a Bitcoin ETF has all but completely died down. After months of delays, denials, and vague explanations, the cryptosphere seems to have set its sights elsewhere.

However, interest in the possibility of a crypto ETF was renewed last months when Business Insider reported that Coinbase and BlackRock had been communicating about working together to form a crypto ETF of their own.

Although no further reports have emerged on the subject, quite a few analysts predict that if the two companies were to form a crypto ETF, theirs would be the most viable candidate for approval so far.

In order to understand whether or not a crypto ETF formed by these two firms would be viable--and whether or not the companies are likely to move forward with an application--it’s important to understand the landscape they would be entering into.

A Long, Tired Road

In July, the price of Bitcoin shot up to highs that it hadn’t seen in months as the world eagerly awaited the SEC’s decision on the Winklevoss’ twins Bitcoin ETF application.

Because the Winklevosses and their cryptocurrency exchange, Gemini, are so prominently recognized, many thought that their application would be approved. They thought this in spite of the SEC’s track record of denying similar applications. They were wrong. The price of BTC fell accordingly.

In their explanation of the denial, the SEC cited concerns of market manipulation, fraud, and insufficient surveillance-sharing agreements.

3.0/ Q: "Why hasn't the SEC approved a bitcoin ETF yet?"

The main concern is market manipulation. Exchange Act Section 6(b)(5) requires that an exchange's rules be designed to “prevent fraudulent and manipulative acts and practices” & “protect investors and the public interest.” — Jake Chervinsky (@jchervinsky) September 20, 2018

Then, excitement began to build once again in early August, when the SEC was originally set to decide on a similar application by asset management firm VanEck and cryptocurrency startup SolidX. Then, the decision was delayed until late September; come late September, it was delayed again for as many as six months.

The final delay was largely met with shock and frustration--however, some analysts viewed the delay as a positive thing. Indeed, the decision to delay seemed to have been made based on the fact that the public had shown such widespread support for the approval of a Bitcoin ETF. Around the time of the delay, VanEck director Gabor Gurbacs tweeted:

I am humbled and impressed by the public support of the VanEck-SolidX initiative to bring to market a well-constructed, liquid, physical, insured Bitcoin ETF. ?1400+ comments, 99%+ in favor. The public has spoken! Bitcoin is compatible with the U.S. and global capital markets. pic.twitter.com/Ufuq0swwYT

— Gabor Gurbacs (@gaborgurbacs) September 20, 2018

And indeed, the numerous denials and delays that the SEC has set against Bitcoin ETF applications seem to have caused Bitcoin ETF supporters to become even more stalwart in their quest to “just get the thing approved.”

It is perhaps partially for this reason that Coinbase and BlackRock were reported to be liaising with one another about creating a cryptocurrency ETF of their own in early September.

More Information is Needed Before Analysts Can Make Accurate Predictions

News reports at the time were clear about the fact that the companies were doing nothing more than talking about the possibility of creating a crypto ETF with one another. It still isn’t clear how serious either firm is about pursuing a crypto ETF any further. Since reports of the original talks about the possible collaboration hit the news, nothing more about the subject has been revealed to the public. Neither company responded to requests for commentary on the matter.

What is known at this point is that the fund would likely track multiple Cryptocurrencies Cryptocurrencies By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw By using cryptography, virtual currencies, known as cryptocurrencies, are nearly counterfeit-proof digital currencies that are built on blockchain technology. Comprised of decentralized networks, blockchain technology is not overseen by a central authority.Therefore, cryptocurrencies function in a decentralized nature which theoretically makes them immune to government interference. The term, cryptocurrency derives from the origin of the encryption techniques that are employed to secure the netw Read this Term instead of Bitcoin alone. It is also widely known that BlackRock has been interested in cryptocurrency for some time. The firm formed a Blockchain Blockchain Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned). In this sense, blockchain is immune to the manipulation of data, making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamp Blockchain comprises a digital network of blocks with a comprehensive ledger of transactions made in a cryptocurrency such as Bitcoin or other altcoins.One of the signature features of blockchain is that it is maintained across more than one computer. The ledger can be public or private (permissioned). In this sense, blockchain is immune to the manipulation of data, making it not only open but verifiable. Because a blockchain is stored across a network of computers, it is very difficult to tamp Read this Term working group to explore the cryptosphere “to identify applications of blockchain-related technologies in financial services” all the way back in 2015.

With the specifics of the possible collaboration unknown, it’s impossible to gauge whether a crypto ETF formed by these two companies would have serious potential to be approved by the SEC. However, if the two firms were to move forward with the collaboration, their individual track records could indicate that their combined powers would be a force to be reckoned with.

Why Would Coinbase Choose BlackRock?

Indeed, Coinbase may be hoping to take advantage of BlackRock’s expertise when it comes to working with (or around) government regulations. “Coinbase is the industry veteran. If they are going with BlackRock, it's because they know this has the best chance of approval,” wrote Joey King in an email to Finance Magnates. King is a developer at Bitcoin.com.

Pelicoin consultant David Ambrogio echoed King’s sentiments, telling Finance Magnates that “the crypto exchange has had discussions with BlackRock's blockchain working group and expects to benefit from the latter’s expertise in launching exchange-traded products….It also hopes to draw from BlackRock’s expertise as one of the largest asset management companies in the world.”

Cindicator Chief Investment Officer Nodari Kolmakhidze pointed out to Finance Magnates that at the end of the day, “it could be one of the best fits for Coinbase, because having such a strong partner could provide the necessary business networking opportunities for Coinbase as well as adding liquidity to the ETF,” also adding that Coinbase could draw on BlackRock’s regulatory expertise.” Cindicator is a platform that “builds predictive analytics by merging collective intelligence and machine learning models.”

Coinbase Continues Attempting to Establish Itself as the Go-To for Institutional Investors

It’s clear to some analysts that Coinbase’ exploration of the possible creation of a crypto ETF with BlackRock is the latest attempt to gain a foothold in the world of institutional investors. After all, the company has launched quite a few products for institutional customers this year: a custodial service, venture capital, and brokerage, among other things.

However, not all of Coinbase’ forays into the institutional investing sphere have been successful. The company’s index fund, which was launched in March of this year, was officially shut down earlier this month. Reports of the shutdown cited insufficient demand from clients, in spite of the fact that the fund was formed in response to “strong demand from institutional and high net worth individuals.”

Nodari Kolmakhidze pointed out in an email to Finance Magnates that the failure of the index fund doesn’t seem to have deterred Coinbase much, however. Additionally, it seems that the company may be choosing to form its own alternative to a crypto ETF.

“They’ve launched Coinbase Bundle, a product for investors that simplifies the purchase of a basket of five cryptocurrencies,” he wrote. “As with an ETF, this is basically an instrument that simplifies the investment and storage process for investors. Coinbase Custody, the institutional-grade custodian service by Coinbase, has also just obtained a license under New York State Banking Law to operate as an independent Qualified Custodian, which adds regulatory clarity.”

The World is Watching

So indeed, Coinbase may be choosing to focus on other routes into the institutional sphere. The companies could also be lying low until the SEC makes a decision on the VanEck/SolidX application, or until it makes a clearer indication of what its final decision may be.

“Time will tell,” said Kolmakhidze.