Bitcoin ETF's, RWA's and Counterparties

Always keep an eye on who owns what

Author

James Moreau
January 11, 2024

Disclaimer: I am not a lawyer, not a financial advisor - none of this is legal or financial advice. This is just my opinion.

Today a bunch of Bitcoin EFT’s started trading on the public markets after a hilariously disjointed week of communications from the SEC was made final yesterday. This really is a big moment for the entire cryptocurrency space - for better or for worse all of the issues many of us nerds have faced and pained over for more than a decade have been brought even more front and center to the general public after black eye after black eye was dealt to the industry through high profile fraud and scams.

From my own personal perspective it’s important for me to reflect on why I’m intellectually invested in this space and have been for 10 years now. Hopefully this reflection can help add some context to your own point of view.

One of the first use cases for cryptocurrencies that got me excited, besides my early experimentations with Bitcoin using it for international money transfers and remittances, was an early Ethereum based project called DigixDAO. Essentially it was meant to be a permissionless way to buy exposure to, and eventually redeem, physical gold shares through a DAO. There’s quite a bit of jargon there, but when you zoom out it’s not entirely unlike the concept of the gold backed ETF securities you can buy on brokerages like Robinhood, Schwab, etc. That’s a pretty high level generalization, but let me elaborate further.

Counterparty Risk of a Different Color?

The ideas around crypto ETF’s, tokenization and Real World Assets (RWA’s) always seem so clunky once you apply some objective thought to the chain of events that have to happen in order to make them sound from a legal, business and (cyber)security perspective. One of the best parts about permissionless crypto and DeFi is once you get your hands on some cryptocurrencies, you can swap, leverage, borrow against, loan and so on without permission from anyone for the most part. You’re trusting that the platforms you interact with are legitimate and security, which can be a risk in and of itself, but otherwise the list of intermediaries extracting value and controlling your funds tends to be relatively known and smaller.

What makes me uneasy about most crypto ETF’s, RWA’s and financialized crypto-hybrid financial products is that underlying web of custody and legalease would make any discerning participant wonder if they actually own or have rights to whatever they are buying into.

For example, if I buy into a Bitcoin ETF, how realistically from a logistics or operational standpoint that I as an investor could get my hands on the Bitcoin being held and traded by a custodian or financial institution associated with the ETF? If I buy any of the Bitcoin ETF’s that were approved this week, do I own Bitcoin anymore than I own real gold associated with gold ETF’s?

If my neighbor wanted to tokenize their house as an RWA and issue shares to people who wish to own a piece of the house, what legal claim on my neighbors property do I have? Can I make a DAO proposal for them to cut their grass to 1 inch instead of 2? If they sell the house, do I get a share of the proceeds? Some of these RWA products are advertised as shared ownership, but it’s hard to believe that.

If acquiring or selling Bitcoin via an ETF or buying an RWA requires as much paperwork and personal information as setting up a brokerage account at Robinhood or Charles Schwab, what exactly is being streamlined or democratized? Especially with anything related to crypto - we all know the U.S. has very little regulatory clarity around digital assets in general, so to expect that you’re getting what you’re paying for, at a good price, in a capital efficient manner is wishful thinking at best.

This might just come down to an argument over semantics - or values. If you’re simply investing to maximize returns for yourself, your clients or whomever, it may not matter one bit whether you own or ever do own any Bitcoin at all, whether self-custodied or not. If the price of what you own increases, you’re happy. However, Bitcoin and the more quality cryptocurrencies were very much mission driven from the start in why they were invented - people dissatisfied with the existing system’s skewed rules and access wanted an alternative to opt out to. Having access to buy food commodities via an ETF is also great from an investment perspective if you have a point of view on their prices going up or down, but owning that ETF won’t solve your problem if you’re hungry and need to eat - if you get my drift.

If highly financialized cryptocurrency products or weirdly structured RWA’s are only accessible to accredited investors, or through regulated brokers and financial institutions, this simply doesn’t offer the benefits and freedoms that self-custodied cryptocurrency has promised and should be viewed with some skepticism. If I have a BoGo coupon at my favorite bagel shop, you’d best believe I’m going to want to be able to redeem it for a meal rather than trade it on the secondary market.

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