DTCC Denies Collateral Status to Bitcoin-Linked ETFs in New Policy

The Depository Trust and Clearing Corporation (DTCC) has issued an update regarding its policies on collateral values. 

As of April 30, per the announcement, the DTCC will not consider exchange-traded funds (ETFs) that have exposure to Bitcoin or other cryptocurrencies as valid collateral. This adjustment will be part of its annual review and update of its line-of-credit facility.

This decision implies that financial entities utilizing DTCC’s clearing and settlement services will not be able to use cryptocurrency-linked ETFs as collateral when seeking credit or engaging in similar financing activities through DTCC’s system. The change is expected to affect how these ETFs are treated in terms of financial stability and credit assessment.

Market Reaction and Brokerage Activities

Despite the DTCC’s new regulations, the broader market and brokerage activities may see a small impact. According to statements from cryptocurrency enthusiast K.O. Kryptowaluty, the use of cryptocurrency ETFs as collateral or for lending purposes may continue at the discretion of individual brokerage firms, depending on their risk management strategies and tolerance.

The DTC system, or Depository Trust Company, is a key component of the financial infrastructure of the United States, acting as the central securities depository. DTC is part of a larger organization called the Depository Trust & Clearing Corporation (DTCC)

what you write…

— K.O Kryptowaluty (@KO_Kryptowaluty) April 27, 2024

Notably, the DTCC’s decision does not universally restrict the use of cryptocurrency ETFs in all financial transactions, but specifically within the context of its credit facilities. Brokerages and other financial institutions may still choose to accept such ETFs as collateral, adhering to their internal guidelines and risk evaluations.

The cryptocurrency market continues to attract institutional investors, particularly with the introduction of spot Bitcoin ETFs in the United States. Since their inception on January 11, 2024, these ETFs have garnered attention, amassing over $12.5 billion in assets under management within the first three months.

This burgeoning interest was evidenced by the substantial investment from financial institutions, accounting for approximately 75% of all new Bitcoin investments in February 2024. The approval and subsequent success of these ETFs suggest a growing acceptance and validation of cryptocurrencies within traditional financial markets.

Recent Trends in Cryptocurrency Fund Flows

Despite the initial surge in investments, recent data indicates a slowdown in net inflows to cryptocurrency ETFs. According to Farside Investors, notable outflows were observed in April, with the U.S.-based spot Bitcoin ETFs experiencing a combined net outflow of $338 million over two consecutive days. Grayscale’s GBTC ETF was particularly affected, reporting a single-day outflow of $82.4197 million.

This trend of net outflows could reflect a variety of market factors, including volatility in cryptocurrency prices, shifts in investor sentiment, or broader economic conditions. It remains to be seen how this trend will evolve and what implications it may have for the overall market stability of cryptocurrency-linked investment products.