Bad News Continues! The US DTCC Deems Bitcoin Valueless, Funds Flee Bitcoin ETFs, Cryptocurrency Prospects Worrying?

The price of Bitcoin (BTCUSD) dropped from $65,279 on Friday evening to a low of $62,400 on Saturday morning after the US Depository Trust & Clearing Corporation (DTCC) announced that it would not assign any collateral to ETFs holding Bitcoin or cryptocurrencies and that it would cease providing loans to these funds starting April 30, 2024.

DTCC is a financial services company that provides clearing and settlement services to the financial markets.

Source: DTCC

This decision implies that financial entities using DTCC’s clearing and settlement services will not be able to use ETFs linked to cryptocurrencies as collateral when seeking credit or engaging in similar financing activities through DTCC’s system. According to CoinTelegraph, this change is expected to affect how these ETFs are handled in terms of financial stability and credit assessment.

Cryptocurrency KOL: Limited Impact from DTCC's New Rule

In a post on X (formerly Twitter), cryptocurrency analyst K.O. Kryptowaluty clarified that this only applies to entity-to-entity settlements within the credit system.

A Line of Credit (LOC) is a borrowing arrangement between financial institutions and individuals or entities, allowing borrowers to withdraw funds within a predetermined credit limit.

However, despite the new regulations from DTCC, the broader market and brokerage activities are likely to be only minimally affected.

He explained that in financial transaction settlements, distinguishing between Delivery versus Payment (DvP) and other settlement methods like Lines of Credit is crucial. DvP is the standard settlement mechanism used in most securities transactions, ensuring that securities are delivered only upon the corresponding payment (cash or other assets); whereas a Line of Credit is a financial tool that allows market participants to utilize borrowed funds for short-term trade financing or to meet other liquidity needs.

According to K.O. Kryptowaluty, the use of cryptocurrency ETFs as collateral or for loan purposes can continue to be decided by individual brokerage firms, depending on their risk management strategies and capacity.

"Using cryptocurrency ETFs for loans and as collateral in brokerage remains unchanged and continues to depend on the individual brokers' risk preferences. Disregard unfounded panic; nothing substantial has happened," wrote K.O. Kryptowaluty on X.

Bitcoin ETFs Face Funding Outflows

This year, the launch of spot Bitcoin ETFs in the US stimulated institutional interest in cryptocurrencies. Within three months of their launch, all Bitcoin ETFs managed in the US accumulated over $12.5 billion in assets.

However, investor interest in spot Bitcoin ETFs seems to be waning, with a recent slowdown in net inflows. Several ETF issuers have recently reported significant outflows, with a total of $218 million leaving in the past day alone.

According to data from Farside Investors, BlackRock's IBIT Bitcoin ETF experienced zero inflows for the second consecutive day, while Fidelity's FBTC saw its first net outflow in a single day, totaling $23 million.

Other US Bitcoin funds also faced significant outflows. Grayscale's GBTC fund continued its outflow trend, losing $139.37 million, while Ark Invest and 21Shares' ARKB funds saw an outflow of $31.34 million. Additionally, Valkyrie's funds experienced an outflow of $20.16 million, and Bitwise's funds saw an outflow of $6 million.

In contrast, Franklin Templeton's EZBC was the only fund to see a daily net inflow, attracting $1.87 million.

Despite these outflows, the net inflow to ETFs since their launch in January has surpassed $12 billion.

Source: Farisde Investors

Why Are Bitcoin ETFs Experiencing Fund Outflows?

Earlier this week, James Butterfill, the head of research at CoinShares, explained that these outflows indicate a weakening interest in ETP/ETFs driven by speculation that the Federal Reserve might delay interest rate cuts.

Meanwhile, some market experts point out that a slowdown is a necessary breather for the market. Bloomberg's senior ETF analyst Eric Balchunas reported that Fidelity's FBTC and BlackRock's IBIT broke the record for highest net assets within the first 72 days of their launch.

"He said, 'The self-holding of IBIT, FBTC, and similar companies shows how overheated everything was, and frankly, it was about time for a breather.'"

Particularly noteworthy are Fidelity's FBTC and BlackRock's IBIT, as they are market leaders, managing over $27 billion in assets collectively.

However, Morgan Stanley reportedly plans to allow its 15,000 brokers to recommend spot Bitcoin ETFs to their clients, which may reignite market interest.