VanEck, Coinbase Execs Blame SEC For Surge In Bitcoin ETF-Driven Borrowing

Executives from VanEck and Coinbase are raising alarms over the U.S. Securities and Exchange Commission’s (SEC) handling of spot Bitcoin ETFs. They pointed to increased borrowing costs as a direct consequence of the regulatory framework. According to these industry leaders, the SEC’s refusal to allow in-kind creation and redemption of Spot BTC ETFs has created inefficiencies. This has forced market participants to take on significant capital costs.

VanEck & Coinbase Execs On Spike In Borrowing For Bitcoin ETFs

Matthew Sigel, Head of Digital Assets Research at VanEck, a prominent player in the BTC ETF market, has been vocal about the challenges brought on by the SEC’s rules. “The SEC’s refusal to allow the in-kind creation and redemption of spot Bitcoin ETFs forces market participants to pre-fund many of their Bitcoin ETF-related transactions,” Sigel said.

Furthermore, he emphasized that this requirement has made the ETF process more capital-intensive and expensive than necessary. Sigel believes that if the SEC were to approve in-kind transactions, trading spreads would tighten. Also, the discount to net asset value (NAV) of Bitcoin ETFs would narrow, eventually benefiting investors.

Coinbase, a prominent crypto exchange, has also been navigating the challenges posed by the SEC’s framework. Matt Boyd, Coinbase’s Head of Prime Finance, highlighted the financial strain caused by the settlement mismatch between cash and Bitcoin transactions.

“Our financing costs are not particularly expensive. They are similar to emerging market financing costs. Anyone allowing a purchase prior to receiving cash is providing a loan and is getting compensated for that in some way,” Boyd explained, according to a report by Risk.Net.

The mismatch stems from the differing settlement cycles for cash and cryptocurrencies. Bitcoin transactions typically settle on the same day. However, the cash required for these trades, provided by authorized participants (APs) such as banks and high-frequency trading firms, follows a T+1 cycle. Hence, this discrepancy forces ETF managers to either pre-fund Bitcoin purchases from their own balance sheets or seek short-term loans from exchanges like Coinbase.

Also Read: Coinbase Firmly Opposes CFTC’s Proposed Ban On Prediction Markets

Calls For Broader Solutions

The SEC’s regulatory stance has had ripple effects across the industry, affecting other major players. For instance, Duncan Trenholme, TP Icap’s Global Co-Head of Digital Assets, noted the significant strain on ETF managers. “Our clients are having to manage a settlement mismatch on the physical hedging of the ETF, which is a strain on their own inventory or balance sheet,” Trenholme said.

This funding challenge is particularly evident with BlackRock’s iShares Bitcoin Trust, the world’s largest spot Bitcoin fund. The fund has attracted substantial inflows since its launch with over $19.5 billion in assets under management. The IBIT Bitcoin ETF average daily inflows have reached $144 million, with a peak of $849 million in a single day, illustrating the scale of the capital involved.

Moreover, the increasing borrowing costs and counterparty risks have led some in the industry to call for broader solutions. Rob Strebel, Head of Relationship Management at DRW, which operates the crypto trading firm Cumberland, discussed the adjustments his firm has made to cope with these challenges.

“Crypto ETFs require settlements that look like what you see in traditional finance versus spot crypto,” Strebel explained. Additionally, he noted that Cumberland has had to internalize the flow from its market-making activities to mitigate additional balance sheet costs.

Others, like Michael Lie, Flow Traders’ Global Head of Digital Assets, suggest that an industry-wide facility to support short-term borrowing could alleviate some of the pressure. “Being able to source hundreds of millions of capital is quite expensive. It’s not so easy. Market-makers need to free up the cash just for one or two days,” Lie pointed out.

Also Read: Zetachain Soars 17% As Coinbase Confirms Roadmap Listing