Louis N. Kizito
On January 10, the US Securities Regulator approved 11 Bitcoin Exchange-traded Funds. Unlike in Uganda, the American federal securities regulator doesn’t have the power to approve listing decisions of American stock markets to list securities such as shares and bonds. However, since the US was dealing with a new asset class in its capital markets that didn’t have known capital markets rules, it made sense for the regulator to approve this product.
The US has joined countries such as Canada, Germany, Brazil, Switzerland, Jersey, Liechtenstein, Guernsey, Australia, and the Cayman Islands that have bitcoin ETFs.
Uganda has two exchange-traded funds, but getting these two exchange-traded funds into the market necessitated courts intervening because officials at the capital markets authority didn’t know how an ETF was structured. The issuer of this ETF, whose basket of securities was not bitcoin but safe government bonds, had to seek judicial review to overturn the decision by the capital markets authority that declined to approve this ETF. It illustrates that the officials at the capital markets authority need to be forward-thinking.
A bitcoin ETF stands for Exchange-traded Funds. It’s an investment that lets you easily buy or sell an asset on the stock market, just like a share of Airtel Uganda Ltd or Umeme Ltd. It works the same way as buying shares in Umeme. It would expose you to Bitcoin’s price movements without buying any “coins”. The fund would invest in either actual Bitcoin or derivatives tied to Bitcoin’s price. Depending on the type of ETF you go for, you buy a share of the ETF through a regular broker instead of dealing with a crypto exchange.
Bitcoin ETFs provide an easy path to invest in crypto to big players in the stock market who find Bitcoin confusing and risky. Retirement benefits schemes and fund managers licensed by the Capital Markets Authority manage trillions of shillings but have steered clear of crypto because of its complexity and regulation issues. Bitcoin ETFs, listed right next to other stock ETFs, bring a feeling of legitimacy and regulatory oversight. So, bitcoin ETFs could trigger mass adoption by inviting huge pools of institutional capital, such as retirement funds, SACCOS, and more.
If you buy the ETF, you don’t own any physical Bitcoin. What you own is a share of a fund that delivers you the price performance of Bitcoin, so if the price goes up, the price of your share will go up, but if the price of Bitcoin goes down, the price of your share will go down. This means that you get to participate in the price action but you don’t have any Bitcoin.
On the other hand, when you buy Bitcoin on-chain and transfer it to a cold wallet, for example, if you buy Bitcoin at an exchange like Yellow Card and then you move that Bitcoin to your wallet, you own your Bitcoin, and you can act as your own Bank.
Most market participants also suggest that since ETFs provide liquidity, this could smooth out some of the price volatility we’ve seen with Bitcoin. Liquidity refers to the ease with which an asset can be bought or sold, so, in this case, the asset is Bitcoin. Higher liquidity usually means more buyers and sellers in the market, making it easier to execute trades without causing significant price movements. The idea here is that increased liquidity in the market may make the Bitcoin market more stable and less prone to sharp and sudden price changes.
The attitude of Capital Markets Authority should change if our capital markets are to grow. We need to embrace innovation in our capital markets. Unfortunately, there are still unjustified biases toward new ideas
Mr Louis N. Kizito is a lawyer.
