I “Fink” Bitcoin Might Be a Good Idea After All

Published 19 August 2022

By Dr Peter J Phillips, Associate Professor (Finance & Banking) University of Southern Queensland

“Fink” Bitcoin Might Be a Good Idea After All -- McGraw Hill ANZ Finance Blog

In 2021, for this blogsite, we worked through an introductory cryptocurrency series. The main purpose was to connect cryptocurrency with some of the concepts that are covered in a financial markets course and introduce the idea in a very basic way. A year on and a lot has changed. Although cryptocurrency has now been around for more than ten years, the last 12 months have been the most interesting and, if we look back on them five or ten years from now, probably the most important.

"...after originally calling Bitcoin an ‘index of money laundering’, Larry has changed his mind..."

We have mentioned the Masters of the Universe before. The Wall Street titans. One of the biggest of them all is Larry Fink, the chief of BlackRock. BlackRock has $10 trillion under management. That’s more than twice the value of the 2022 GDP of Germany. Larry is a force to be reckoned with. During the 2008 financial crisis, BlackRock was called ‘the fourth branch of the US government’. If you need further convincing, consider ESG (environmental, social, governance) investing. Its prescriptions influence the policies of governments around the world. It is not an overstatement to say that ESG investing would not be as powerful a global force without Larry Fink and BlackRock. And now, after originally calling Bitcoin an ‘index of money laundering’, Larry has changed his mind and is setting up an investment trust to allow his wealthy and institutional clients to gain exposure to Bitcoin. The trust will track the price of Bitcoin.

The announcement comes several months after Fink first flagged the possibility of BlackRock’s involvement in the crypto markets. In a letter to shareholders in March 2022, Fink explained how his team was carefully studying cryptocurrency and looking for opportunities. About a month later, BlackRock partnered with Circle, a company founded in 2013 by Jeremy Allaire and Sean Neville. Circle started as a peer-to-peer payments company but has since become more focused on commercial blockchain applications. Circle is the issuer of the USDC stablecoin. And then in August, BlackRock partnered with the cryptocurrency exchange Coinbase, juicing BlackRock into Coinbase’s institutional investment platform.

While the changing of Larry’s mind and the entry of BlackRock into the cryptocurrency markets is newsworthy on its own, the bigger story is the connection to an ongoing struggle that has been taking place in the crypto markets. This is the desire to establish a cryptocurrency exchange traded fund (ETF).

"Cryptocurrency entrepreneurs have been trying for years to get approval to launch a “spot” cryptocurrency ETF*."

ETFs are a transformative asset that have grown exponentially since 2010. ETFs allow investors to access a diversified portfolio of stocks by buying shares in the ETF through a broker (i.e., buying and selling on the ASX rather than over-the-counter from the fund manager). While the first ETFs were relatively bland, they have become an exciting asset class. Not only are there Australian share funds, international share funds, and index funds, but there are also ‘themed’ ETFs that contain selections of companies from specific industries from around the world. For example, there might be a “robots” fund that invests in companies that are involved in the robotics industry. Since many of these companies are in different parts of the world, the ETF can allow investors in Australia to gain exposure to those companies simply by buying shares in the ETF listed on the ASX whereas investing directly in those companies would be a bit (or a lot) more trouble.

Cryptocurrency entrepreneurs have been trying for years to get approval to launch a “spot” cryptocurrency ETF*. The ETF would allow investors to gain exposure to the cryptocurrency markets simply by buying shares in the ETF rather than go to the trouble of buying crypto directly. If the crypto ETF was solely devoted to Bitcoin (i.e., a Bitcoin ETF), then the value of its shares would track Bitcoin up and down. If Bitcoin went up 10%, so would the shares. And vice versa. Unfortunately for the entrepreneurs involved, the Securities and Exchange Commission (SEC) in the US has so far declined to approve the applications that have been submitted. The most well-known entrepreneurs in this space have been the Winklevoss twins, Cameron and Tyler. The twins sued Mark Zuckerberg in the early 2000s, claiming he stole their idea for Facebook. They received 6 million Facebook shares (adjusted for stock splits) as settlement, and their stake is now worth around $1 billion. In the early 2010s, they started the Gemini cryptocurrency exchange and have tried on several occasions to launch a cryptocurrency ETF.

*Note: a spot ETF means that the share price would be indexed to the spot price of Bitcoin (or a collection of currencies) and the ETF would hold Bitcoin on behalf of the shareholders. Futures ETFs for cryptocurrency already exist and these hold futures contracts (not the cryptocurrency itself). The SEC appears to be concerned about the security of the holdings, but commentators seem to think that the matter will be resolved at some point.

Larry Fink’s new Bitcoin trust can potentially be converted into an ETF in the future and BlackRock’s entry into the marketplace is seen as significant for this reason. BlackRock might use its influence on regulators. When (if?) the SEC approves a Bitcoin (or general cryptocurrency) ETF, it will be major step towards connecting the cryptocurrency markets with mainstream finance. I recently mentioned Bitcoin to someone, and they said it was something that only money launderers would be interested in. Larry Fink used to think so too.

Discussion Question

Why is the quest to gain the regulatory approval of a bitcoin (or more general cryptocurrency) ETF so important for cryptocurrency entrepreneurs?