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Dan Hoover, Chief Compliance Officer of Castle Analytics, has identified a lack of transparency, unclear governance, and market concentration as the potential disadvantages of spot ETFs. Hoover elaborated on these issues in an exclusive chat with Coin Edition amid the growing enthusiasm among crypto users on the likelihood of spot ETF approvals.
As the crypto industry prepares for the likely approval of spot Bitcoin and Ethereum ETFs, most crypto users seem excited about the potential expansion and industry gains that may follow. However, Hoover noted potential setbacks that could hurt the crypto ecosystem if not addressed. He explained the implications of such setbacks, noting examples where necessary.
According to Hoover, crypto ETFs make it easier to build potentially market-moving positions off-chain without transparency or timely data availability, as occurred with the now-defunct crypto hedge fund Three Arrows Capital in 2022. He noted that ETFs add leverage and thus increase market volatility.
Hoover emphasized that settlement times need to be clarified, noting that ETFs settle in T+2 U.S. business days, unlike digital assets transactions that settle in minutes. Hence, accommodating this timing gap requires leverage, borrowing, or financing, used today in cash-creating ETFs with some non-U.S. holdings.
The compliance officer further explained that it is unclear how traditional proxy voting or other corporate governance models for ETF managers will work in the context of a crypto consensus. Hence, there is also a need for clarity on the governance processes while launching an ETF.
Finally, Hoover believes users need to be aware of the potential imbalance in market concentration that could arise from ETF adoption. He explained that most proposals rely heavily on the U.S.-based exchange Coinbase, and the SEC is mandating cash-creation of new ETF shares.
According to him, for performance and tracking reasons, most of those BTC, ETH, etc., will be bought on Coinbase, increasing market concentration. He considers such imbalance in market concentration a sizable risk in a crypto market where significant friction prevents easy selection of trading counterparties.
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