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Three US asset managers are preparing to launch exchange traded funds investing in so-called “memecoins” linked to US President Donald Trump and his acolyte Elon Musk.
The proposed funds are among a flurry of exotic cryptocurrency ETFs that could be unleashed in the US in the wake of Trump’s election victory.
The latest filings are likely to prove controversial, though, given that memecoins are a particular kind of digital asset that has no cash flow, business model or practical use underpinning their valuations. (See box)
“We are moving away from the purpose of capital markets. This type of speculative instrument might make more sense in a casino than in a stock market,” said Bryan Armour, director of passive strategies research, North America at Morningstar.
“I don’t understand the use case or the purpose of these ETFs, other than to gamble on whether the price is going up or down.”
President Trump launched his $TRUMP memecoin days before his inauguration. Adherents can buy it as an “expression of support”, according to the small print.
Since then the cryptocurrency has gone on a rollercoaster ride, surging above $72 on January 19 before tumbling back to $28, according to CoinGecko.
However, this extreme volatility has not deterred the ever-inventive ETF industry from wanting its share of the action.
Rex Financial, an issuer of covered call and leveraged and inverse ETFs, in alliance with Osprey Funds, a crypto specialist that runs over-the-counter and private placement digital asset funds, is first out of the block.
It has filed with the US Securities and Exchange Commission to launch a $TRUMP ETF — which will automatically be given the green light if the SEC does not object within 90 days.
Rex and Osprey have also applied to create ETFs tied to dogecoin, the world’s largest memecoin — which Musk has championed and which has surged in price since he was installed as head of Trump’s Department of Government Efficiency — as well as Bonk, based on another internet meme.
Separately, Bitwise Asset Management, another crypto specialist whose roster of funds includes eight ETFs, headed by its $4.5bn Bitcoin ETF (BITB) is also hoping to get in on the act.
It has filed a registration document for a dogecoin ETF in Delaware, a preliminary step to filing an application with the SEC.
The moves could be an early test of the SEC’s openness to digital assets under its new leadership. Trump has nominated Paul Atkins, a pro-crypto businessman, and former SEC commissioner, to lead the financial regulator.
Under Gary Gensler, who led the SEC until earlier this month, the regulator frustrated much of the ETF industry with its stance on cryptocurrencies.
The SEC did allow ETFs to invest in bitcoin futures contracts in 2021, but funds investing directly in “physical” bitcoin only debuted a year ago after the regulator had lost a court case against crypto fund manager Grayscale Investments. ETFs investing in physical ether, the second-most popular cryptocurrency, followed in July.
Trump’s second coming has already spurred a wave of filings for ETFs investing in a host of other digital assets, such as solana, XRP and Litecoin in expectation that the regulator is set to become more open to a wider range of crypto ETFs. Derivatives-based risk-managed bitcoin ETFs may also be on the way if the SEC is amenable.
Memecoins, though, would arguably be the most unusual securities yet to be packaged in an ETF anywhere in the world.
“There are plenty of questionable investments packaged into ETFs, but memecoins would take this to an entirely new level,” said Nate Geraci, president of financial adviser The ETF Store.
“Historically, the vast majority of memecoins trends towards zero, which creates a dilemma for issuers. The optics of offering memecoin ETFs could be detrimental to a firm that wishes to be taken seriously by Wall Street,” Geraci added.
Armour believed ETF issuers “are taking advantage of Trump’s campaign promises, the changing of the guard at the SEC and the expectation of less scrutiny from regulators”, in order to test the new boundaries.
“The SEC approved spot bitcoin and ether ETFs reluctantly, [and] because a futures market existed and there was some regulatory link into another market,” Armour added. “But there is no futures market for $TRUMP coin or dogecoin or whatever bonk is.”
In effect, he argued, Rex, Osprey and Bitwise “are effectively buying a small call option. They have no idea if the SEC will approve this but they want to be in the first batch if it does.”
Rex and Osprey declined to comment. Matt Hougan, chief investment officer at Bitwise, said: “There has been a major shift in the regulatory climate in the US and the attitude to crypto with the new administration coming in.
“We have seen a lot of filings from a lot of issuers with a lot of ideas and I think that will continue.”
On the face of it, Trump would appear to have a vested interest in memecoin ETFs being approved, given that it might help usher money into his own token.
Those the Financial Times spoke to were divided as to whether this might be a factor in the SEC’s decision, however.
“A leadership change is definitely beneficial for crypto but the SEC is still a regulator, and I don’t think that means that whatever an appointee wants is automatically accomplished,” Armour said.
Hougan agreed. “It’s a very serious agency,” he said.
“The staff layer, the career or part of career lawyers, are really just trying to apply the laws as they are written. The political layer [the commissioners] can shift the administration in one way or another, but they can’t completely bend it to their will.”
However, Geraci argued: “At this point, anything is possible when it comes to future ETF approvals.”
How do memecoins differ from other cryptocurrencies?
Memecoins may appear similar to other cryptocurrencies. Under the surface, though, there are a number of differences. Other cryptocurrencies have been created with specific use cases in mind, such as facilitating decentralised finance, “smart” contracts, or acting as a store of value.
Memecoins, in contrast, do not even have these underpinnings. They are often created as jokes, typically do not have serious use cases and are more an embodiment of a strand of online community engagement.
“Memecoins are totemic artefacts of the emerging crypto culture. They are almost collectables in a sense and they are a way of expressing your affiliation with something,” said Hougan of Bitwise Asset Management.
“There are hundreds of millions of people who have a deep affinity with this culture. It’s an inherently digital culture where memes are extremely important to it. Is it any different to baseball cards or high art? No, it’s only different in form.”
Bitwise has filed a preliminary document for an exchange traded product that would invest in dogecoin, the oldest memecoin, created in 2013 as a joke with a now deceased dog as its logo.
Despite its light-hearted origins, Hougan believed dogecoin was a suitable asset for a serious ETP.
“The reality is that there are a lot of people that want to invest in dogecoin. It’s the sixth-largest crypto asset in the world by market cap and it trades over $1bn a day,” he said.
Some might fear wrapping dogecoin up in an ETP might be seen as validating it as a legitimate asset class, potentially pulling in some investors with a limited understanding of its utility.
However, Hougan argued that the SEC, which will adjudicate on applications to launch memecoin ETPs “is not a merit-based regulator”.
He drew allusions to ETFs for other relatively risky assets such as “junk bonds, speciality oil plays, obscure commodities or stocks in countries with unclear securities laws”.
Having said that, Hougan said each token should be judged on its own merits.
“I don’t think what we are heading towards is a free-for-all,” he said. “I don’t think every crypto asset is appropriate for an ETP. There are corners of the crypto market that are not liquid enough, that are subject to manipulation and are subject to insider control that are not suitable for an ETP.”
https://www.ft.com/content/f857ee8c-c2ba-441f-b392-57adec640e15
