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Novogratz on crypto ETFs: There's no doubt Canada is one step ahead of the U.S.

Jared Blikre
·4-min read
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U.S. regulators are doing American investors a disservice by not authorizing cryptocurrency ETFs. There are over one dozen ETFs currently on hold in the review stage at the U.S. Securities and Exchange Commission. Meanwhile, Canadian regulators began allowing investors to buy crypto ETFs in February.

"The Canadian regulators are one step ahead — there's no doubt about it. It's surprising to me that the SEC has also been so slow. I assume with [SEC chief Gary] Gensler now taking the seat officially, that's going to speed up," Mike Novogratz, Galaxy Partners CEO tells Yahoo Finance Live.

Novogratz and Galaxy worked with asset management firm CI Financial to launch the CI Galaxy Ethereum ETF (ETHX-U.TO) on the Toronto Stock Exchange Tuesday. It's one of three ethereum ETFs that Canadian securities regulators have approved for listing this week, and they are the first of their kind in North America. In February, the Purpose Bitcoin ETF (BTCC-U.TO) was similarly the first bitcoin ETF to list in North America.

But U.S. investors who want crypto exposure have it tough if they don't want the custodial headaches that can come with buying actual coins and tokens. Grayscale Investments manages cryptocurrency trusts, such as the Grayscale Bitcoin Trust (GBTC), which are exchange traded products and somewhat similar to ETFs. But because of their structure, they're subject to so-called tracking errors, where the trust trades higher or lower than the underlying asset it's supposed to be tracking. True ETFs tend to have fewer and less volatile tracking errors because market makers can dynamically create and destroy baskets of new shares.

Grayscale crypto products are only available to accredited investors in the U.S., which excludes many budding crypto enthusiasts who can't satisfy the net worth and income requirements. Grayscale says they always intended to eventually convert the trusts to ETFs. But until the SEC starts green lighting the asset class, they're effectively in the same holding pattern as other filers in the U.S.

Novogratz says, "It makes no sense that we have been so slow. They allowed the Grayscale Trust, which was a tough way for retail to participate. They paid high fees. [The Trust] traded at a premium to the price of the underlying [asset] for many, many months. Now it's trading at a big discount."

CI GAM has waived the 40 basis point management fee it normally charges through June 15. Most Grayscale products charge a 2% management fee.

Canadian investors have an edge on U.S.

Global securities regulators were understandably slow to act in 2018 after the price of bitcoin plunged from its 2017 peak of nearly $20,000 to $3,100 that year. But the game has changed, as crypto has emerged as an asset class, with Wall Street institutions incorporating it on their platforms and offering it to clients

Kurt MacAlpine, CI Financial CEO, appeared on Yahoo Finance Live with Novogratz and explained exactly how U.S. investors are being deprived by regulators holding up crypto-based ETFs. Essentially, investors are being locked out of professional crypto investment advice by their investment advisors, which don't have access to crypto ETF and mutual fund products.

"I am very excited by the fact that Canadian regulator has approved these strategies because now clients don't have to go away from their advisor to access cryptocurrencies, which is essentially what they were forced to do beforehand. By not having a managed product in the marketplace, they were forced to hold them in wallets sitting outside of the very important, very critical advice-based relationship," says MacAlpine.

Canadian investors now have options. "We get a lot of inbound questions from clients asking us how do they think about digital assets? How does it fit into their portfolio? How does it stack up from a deployment of capital relative to other asset classes?" says MacAlpine. "So now, having it in the friendly format and structure, it allows them to get advice based upon those particular assets, which they couldn't do in the case of ethereum as of yesterday. Now people can get access to it through their financial advisor, which I think is absolutely critical to think about it as a holistic, balanced advice-based financial portfolio and relationship." 

But when it comes to getting similar products in the U.S., Novogratz is hopeful for U.S. regulators, saying, "[Gensler] understands crypto well, and he likes bitcoin and ethereum. He taught a class on it at M.I.T."

2021 Berkshire Hathaway Annual Shareholders Meeting
2021 Berkshire Hathaway Annual Shareholders Meeting

Jared Blikre is an anchor and reporter focused on the markets on Yahoo Finance Live. Follow him @SPYJared