Last week, Brazilian-based QR Capital received approval from the Brazilian Securities and Exchange Commission (CVM) to list an exchange-traded fund (ETF) composed solely of bitcoin (BTC), on the São Paulo-based B3 Stock Exchange. The ETF is the first 100 percent BTC exchange-traded fund to be approved anywhere in Latin America, and the fourth to be approved in the G-20 countries. The first three were approved last month in Canada.
The U.S. still does not allow crypto ETFs to trade on national stock exchanges.
The QR Capital ETF is slated to begin trading in June and, when it does, the ETF will be open to any Brazilian citizen, as well as international investors, who have an account with a broker dealer affiliated with B3, says QR Capital Founder and CEO Fernando Carvalho.
More than 4,000,000 Brazilians currently have access to the B3 stock exchange, says Carvalho. It is anticipated that the demand for the ETF will be staggering.
For the first time, Brazilians investors will be able to participate in a fully BTC-regulated investment vehicle. Unlike the U.S. and many other countries, crypto exchanges are not specifically regulated in Brazil.
Further, the QR Capital ETF is the only Brazilian investment fund that is invested 100 percent in BTC. All other investment funds open to small investors are constrained by Brazilian law to hold a maximum of 20 percent of crypto currencies.
Carvalho expects that demand will also come from international investors.
“The approval of the ETF in Brazil is significant,” says Rosine Kadamani, a Sao Paulo-based regulatory attorney and member of the Global Future Council of Cryptocurrencies at the World Economic Forum, “because now there will be another option for investing in bitcoin in a regulated environment.” It will be easy, says Kadamani, like purchasing shares of stock. Easy and less costly than the current options.
ETFs are funds designed to follow the price variation of an underlying asset or index and, therefore, are said to be passively managed. In other funds, like ordinary equity funds, management picks and chooses investments to find the best market opportunities. According to Kadamani, “the management fee of an actively-managed fund can be 1-2% or more. But the administrative fee for an ETF is much less, around 0.5%.”
She also thinks the time is right for a Brazilian ETF.
Kadamani explains that Brazil has younger, less developed capital markets than the U.S, and that Brazilians have traditionally invested in high interest State-issued bonds, which ensured high returns with low risk. But that is changing with a significant reduction in the interest rates. “There is a move to the capital markets, and the approval of the ETF could be a pivotal moment, especially when combined with the growing number of Brazilian companies going public” says Kadamani.
Next comes the work of putting the fund together and acquiring the bitcoin.
With approval from the CVM in hand, QR Capital has begun their primary raise, says Carvalho. He anticipates the raise will yield 500 million BRL or about 90 million USD over the next several weeks.
According to Carvalho, QR Capital will buy spot assets in regulated exchanges abroad in the open market. The ETF will rely on the CME CF Bitcoin Real Time Index (BRTI), a global standard for pricing BTC.
Carvalho says the challenge will be to replicate the index price.
“We have regulatory restrictions on where we can trade BTC. We can only exchange BTC with regulated partners.” This helps to ensure that the BTC held by the fund is beyond reproach. “The KYC/AML requirements guarantee the security and origin of the BTC,” Carvalho says.
“I suspect the U.S. regulators are watching closely, and will be learning from this ETF approval and subsequent trading (as well as the recent approvals in Canada),” says Lewis Cohen, Founder of DLx Law. As more time passes and these products prove themselves to be safe and popular, the SEC will have greater comfort with ETFs and other crypto-related investment products, he added.
In considering how the bitcoin will be custodied, Carvalho relates that QR Capital will rely on their international partners, BitGo and Coinbase Custody, based in the U.S. This is what they currently use for the three QR Capital hedge funds that invest in BTC.
Annemarie Tierney, former SEC regulator and blockchain strategy consultant, notes the irony in a Brazilian ETF custodying digital assets with U.S. custodians, while the U.S. Securities and Exchange Commission has yet to approve a national stock exchange listing for a crypto ETF, despite multiple attempts. She says, “the growing regulatory acceptance for publicly traded crypto ETFs in other jurisdictions highlights the competitive disadvantage facing issuers seeking to launch a similar product in the U.S. public markets.”
Carvalho serves as the regional ambassador to the Global Blockchain Business Council (GBBC) which issued its GSMI mapping initiative last fall. The GSMI analyzes the current blockchain landscape and summarizes blockchain related legislation from 185 jurisdictions. According to Carvalho, this type of resource has been helpful in demonstrating the global movement towards developing a regulatory infrastructure for crypto currency and blockchain tech. The GBBC enables greater interactions between regulators globally which cannot be underestimated, says Carvalho.
Looking ahead, Carvalho suggests that the bitcoin ETF is a “game changer” because it provides important access to legacy markets and allows individuals to invest securely without having to be concerned about securing their private key or having technical knowledge about how to keep their private keys safe. Carvalho expects bitcoin ETFs to spread to other jurisdictions.
Tierney agrees with this assessment. She believes it’s just a matter of time before the SEC follows suit. She offers, “the market is hopeful that with a new administration, the SEC will provide detailed guidance on what is needed to obtain approval and move forward to allow public crypto-ETF listings.”
Carvalho opines that the current cycle of demand for bitcoin is different from that of 2017, where there was a sharp price increase and then a plummet. These days, the price of bitcoin continues to climb (with small fluctuations) due to increased demand from institutional investors and corporations buying BTC for their treasuries, says Carvalho.
“There is still more room to grow. It is early days for the integration of BTC into the legacy capital market structure,” Carvalho says