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First US Bitcoin ETF launches using Cayman structure

The first U.S. Bitcoin futures exchange traded fund (ETF) launched this week with close to $1 billion in shares traded on the first day.


ProShares’ Bitcoin Strategy ETF began trading on the New York Stock Exchange under the ticker BITO after receiving approval from the U.S. Securities and Exchange Commission on Friday.


It took the SEC eight years to approve the first US Bitcoin ETF out of concern over market manipulation in cryptocurrencies.


In August, SEC Chair Gary Gensler indicated that a futures-based bitcoin ETF was most likely to be granted approval by the Commission.


ProShares filed its application to launch the ETF the next day.


Ultimately, the SEC was more comfortable with the fact that a futures-based Bitcoin ETF would fall under both the regulation of the futures market and the regulation of ETFs under the Securities Act of 1940.


Through the ETF, institutional and retail investors gain access to Bitcoin, without having to buy and store the cryptocurrency itself, which for many represents additional complexity.


Because the ETF is based on futures, investors are buying and selling shares that represent the value of contracts betting on the price of Bitcoin.


Spot-based ETFs, which are tied directly to the price of cryptocurrencies, are still awaiting permission to launch in the US. In Canada, where they have been trading since February of this year, they have been extremely successful.


BITO is an actively managed ETF that holds Bitcoin futures traded on the Chicago Mercantile Exchange.


Cayman structure


The ETF expects to invest about a quarter of its assets into a Cayman Islands wholly-owned subsidiary to manage the tax efficiency of the fund.


Typically, the Cayman Islands portion of such funds invests in futures contracts and provides the fund’s notional value, while the remainder is held in high-quality US debt securities or commodity equities that act as collateral for the futures investment.


This is one of several strategies that can be used so that a commodity ETF can avoid the complexities of a partnership structure and its required K-1 tax reporting of the investors’ partnership income.


Because ETF’s investment in the subsidiary is considered by the IRS to be an equity holding, the fund can be structured as a traditional open-end fund and is taxed like an equity or bond ETF at the same ordinary income and long-term capital gains rates.


Source: Cayman Compass


IMS is one of the longest established company management firms in the Cayman Islands. IMS is licensed by the Cayman Islands Monetary Authority to provide independent directors, company management and incorporation, mutual fund administration, captive insurance and trust services. For more information about our services, please contact us.


Disclaimer: this publication does not constitute legal or professional advice and should not be relied on as such.

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