Why BlackRock and Other Fund Companies Are Pushing Into Crypto

“It’s a significant revenue opportunity for players in this space,” says Matt Hougan, chief investment officer of crypto fund company Bitwise. In BlackRock, “the world’s largest asset manager is planting a flag in the ground and saying it believes

Bitcoin

will matter for the next five or 10 years.”

BlackRock CEO Larry Fink is also talking up Bitcoin, saying it could “revolutionize” finance and that he wanted to make it cheaper for investors through an ETF, according to a recent interview on Fox Business.

Along with BlackRock, fund companies such as

Invesco

(IVZ),

WisdomTree

(WT), and Fidelity Investments have refiled applications for Bitcoin ETFs. The filings signal renewed hopes that, after years of rejections, the Securities and Exchange Commission will approve a spot-price-based Bitcoin ETF. Bitcoin has surged more than 20% since BlackRock’s filing and is up 80% for the year, to about $30,000. The rally has pulled up the broader token market and stocks like

Coinbase Global

(COIN), up 93% in the past month.

Fueling the gains is optimism that BlackRock addressed the SEC’s main objection in rejecting Bitcoin ETFs. The SEC has long argued that crypto trading platforms don’t have adequate surveillance to detect fraud and manipulation in Bitcoin markets, which could impact ETFs based on the spot price of the token.

To address that issue, BlackRock helped strike a novel deal in which the Nasdaq exchange would assist in detecting fraud on Coinbase’s trading platform. Since Coinbase is the main U.S.-based exchange, the idea is to allay the SEC’s concerns about manipulation in the spot market. Other fund companies amended their applications with similar measures. 

Bitcoin is now available in an ETF format but only through futures markets, which are overseen by

CME Group

(CME) and

Cboe Global Markets

(CBOE). The largest such fund, the

ProShares Bitcoin Strategy ETF
(BITO), has been a modest success and attracted copycats. But a spot-based fund could be cheaper, avoiding the costs and position limits that futures funds contend with when “rolling forward” Bitcoin contracts.

BlackRock has a nearly unblemished record in getting ETFs through the SEC. The company before now has filed 576 ETF applications and been rejected only once. Given that record and other factors, research firm

Capstone

estimates a 40% chance that BlackRock’s application makes it through.  

“They have a good relationship with the SEC, and there is a reputational risk involved that BlackRock is well aware of,” says Bryan Armour,

Morningstar
’s
director of passive research. “It seems like BlackRock must know something that we don’t.”

BlackRock and the SEC declined to comment.

Enthusiasm, meanwhile, is building for courts to favor crypto over the SEC. Crypto companies recently won a victory after a judge suggested that the XRP token didn’t qualify as a security when traded in secondary markets. Next up could be a key decision in a case involving the

Grayscale Bitcoin Trust

(GBTC), which trades like a closed-end fund. Grayscale has urged the SEC to allow it to convert the trust into an ETF, and sued the agency over its rejections.  

For fund firms, Bitcoin is one of the last untapped profit opportunities. ETFs have saturated the stock and bond markets, compressing fees to almost nothing for broad-market index funds. But crypto can be lucrative. The ProShares ETF carries a nearly 1% annual expense ratio. Grayscale’s fund has a 2% expense ratio, worth more than $374 million in annual revenue to the firm, based on the trust’s $18.7 billion in assets. 

If an iShares Bitcoin ETF is approved, it probably won’t be a big revenue driver for BlackRock. The firm manages more than $3 trillion in ETF assets, taking in around $17.9 billion in total revenue in 2022. Bitcoin itself is only worth $600 billion in market value. If BlackRock captured 5% of the market, at a 0.50% annual fee, it would be worth just $150 million in additional revenue.

Still, those figures assume Bitcoin doesn’t increase from recent prices. And a Bitcoin ETF might be a gateway to other digital assets. “It’s worth it to them even if it only gets them half a percent in asset growth,” says Stephen Biggar, an analyst at Argus Research. “This is one of the largest opportunities that has come along in more than a year.”

Fund companies are tapping into crypto in other ways. Firms including

Charles Schwab

(SCHW) and Fidelity this summer backed a new crypto exchange that could function similarly to the NYSE, providing an alternative to platforms like Coinbase. Fidelity recently launched a crypto trading platform, integrated into its app and other brokerage services, offering Bitcoin trades with as little as $1, commission-free. 

Crypto ETFs are expanding elsewhere. The first leveraged Bitcoin futures ETF, Volatility Shares’

2x Bitcoin Strategy
(BITX), recently launched. Fund companies like Valkyrie, Bitwise, and Global X have come out with ETFs to invest in blockchain-related businesses such as Bitcoin miners and trading platforms.

Some asset managers, meanwhile, have begun to “tokenize” traditional funds in assets such as gold and Treasuries—putting them on blockchains so they can be bought and sold with tokens, 24/7.  

Franklin Resources

(BEN) now has a tokenized money-market fund,

Franklin OnChain U.S. Government Money
(FOBXX), which sits on blockchains called Stellar and Polygon. The company operates blockchain “nodes” for networks including Ethereum, Cardano, and Solana, says senior vice president Sandy Kaul, and it has pitched a crypto organization called MakerDAO to invest some of its reserves in the tokenized money fund.

Kaul says she believes Franklin, other fund companies, and most other businesses in the future will end up running on blockchains.

Another company banking on crypto is ETF sponsor WisdomTree. The firm recently launched an app that lets users buy and sell Bitcoin, Ether, and nine tokenized funds that hold traditional assets like stocks and Treasuries. Investors can buy the funds with “WisdomTree dollar tokens,” a reserve-backed “stablecoin” whose value is pegged to the dollar. “We see this as akin to the early days of ETFs,” Will Peck, head of digital assets at WisdomTree, tells Barron’s. Crypto and tokenized funds “could be the next disruption,” he says.

One benefit for consumers, WisdomTree says, is that a tokenized fund or ETF transaction could settle instantly, 24/7, and consumers could access the cash through an app. One day, a consumer at a coffee shop could sell a tokenized gold fund and immediately use the money to buy a latte, without having to wait days for a transaction to settle and funds to move into a bank account.

“The speed and flexibility that tokenization gives you is compelling,” says

Bank of America

crypto strategist Alkesh Shah. “People expect to be able to make changes to their assets anytime they want. They don’t want to have to wait until a firm is open or wait two days for a wire transfer to settle.”

Regulators could still throw up roadblocks. The SEC requires tokenized funds to keep a duplicate copy of ownership records in standard formats, aiming to ensure that blockchains aren’t the only record-keepers. The SEC may reject BlackRock’s Bitcoin ETF, or that of any other fund company. And the agency has launched a slew of lawsuits and regulatory actions against crypto companies, including Coinbase.

The SEC isn’t alone in trying to put the brakes on crypto. State financial regulators have ramped up objections—recently blocking Coinbase from selling a high-yield “staking” service. Getting Bitcoin into 401(k) plans, which Fidelity is trying to do, could run into lawsuits or regulatory hurdles from the Labor Department, which has signaled its opposition to such initiatives.

Fidelity declined to comment on its 401(k) plans, but said in a statement that it reapplied for a Bitcoin ETF because “a meaningful portion of our customers are interested in, and own, digital assets.”

What’s good for fund companies isn’t always good for customers. ETFs that seize on a hot theme—whether cannabis or artificial intelligence—often flag a market top. No one knows what Bitcoin is really worth; Morningstar recently compared valuation models to gambling on horse races.

For investors who choose to gamble, ETFs could bring down costs and alleviate concerns that a crypto company could run away with their assets. But make no mistake, funds are primarily looking out for themselves, says Morningstar’s Armour. “The fund industry hasn’t gotten any meaningful slice of the crypto industry,” he says. “The opportunity for them is obvious.”

Write to Joe Light at joe.light@barrons.com