Hidden Risks in Bitcoin ETFs, Says Custodia Bank CEO
Custodia Bank CEO Caitlin Long is warning about potential hidden risks associated with certain Bitcoin ETFs that are set to launch in the United States. She believes that sponsors may use securities lending to generate more profit, which can pose risks to investors. Long’s concerns stem from the race to the bottom on management fees among Bitcoin ETF applicants, with fees as low as 0.24%. She suggests that these low fees may indicate the use of securities lending as a way for asset managers to make money.
The Threat of Securities Lending
Securities lending involves temporarily transferring shares or bonds to a borrower who provides collateral and pays a borrowing fee. It is commonly used for short selling, hedging, and arbitrage strategies. Long argues that securities lending has become popular in the fund management industry as a way to generate additional profit beyond fees. However, she believes this practice poses hidden risks for investors due to limited disclosure about how cash proceeds are reinvested.
Will ETF Issuers Engage in Securities Lending?
The SEC is expected to approve Bitcoin ETF applications by January 10. In response to Long’s concerns, Hany Rashwan, CEO of 21Shares’ parent company, clarified that their application explicitly excludes securities lending from their business model. However, CoinMetrics co-founder Nic Carter interprets the low fee arrangements as a sign of anticipated massive inflows into these products.
Hot Take: Hidden Risks Call for Investor Caution
As Bitcoin ETFs prepare for launch in the United States, Custodia Bank CEO Caitlin Long raises concerns about potential hidden risks associated with securities lending. With sponsors offering low management fees, there is speculation that they may engage in securities lending to generate additional profit. While some ETF issuers have explicitly ruled out securities lending, Long warns that limited disclosure about reinvesting cash proceeds poses risks for investors. As the SEC considers approving these ETFs, it is crucial for investors to exercise caution and thoroughly evaluate the potential risks involved.
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