Moriarty: Why Bitcoin ETFs Likely

'Spider Woman’ knows a thing or two about ETF innovation. She shares her perspective on bitcoin and other ‘exotic’ ETFs.

Reviewed by: Lara Crigger
Edited by: Lara Crigger

Kathleen MoriartyAttorney Kathleen Moriarty bears the nickname "The Spider Woman" with pride and good humor. Moriarty, a partner at Chapman and Cutler LLP, is best-known for her hands-on assist in building the legal framework for the SPDR S&P 500 ETF Trust (SPY), the first—and still the largest—U.S.-listed ETF (see: "SPY At 25: Institutional Rock Star").

But Moriarty's impact on the ETF industry goes well beyond a single ETF. She has helped launch several of the most groundbreaking products in the industry, including 2004's SPDR Gold Trust (GLD), the first physical metals ETF; and the first leveraged ETFs, issued by ProShares in 2006. Most recently, she represented the Winklevoss twins in the first—albeit failed—attempt to  bring a bitcoin ETF to market.

On the eve of SPY's 25th birthday, Moriarty shares what excites and worries her about the ETF marketplace, including bitcoin ETFs, blockchain and a potential impending "ETF Rule." You've told the story of how SPY came to be many times over the years. What's one thing about the process, though, that you think hasn't gotten enough attention?

Moriarty: One interesting thing is that when we first launched SPY, the trust was only going to have a lifetime term of 25 years. It would have been expiring this January.

But about six months down the road, SPY was being bought more than we thought it would be, so we decided we'd better lengthen that [lifetime] out. It's kind of a complicated legal termination now, but basically, we lengthened it out either by 100 years or by the life spans of the children of various people at the AMEX. When they die, that will be when SPY goes. The ETF industry would have been so different if you'd stuck to that initial expiration date.

Moriarty: I think probably either someone would have extended it, though, or they would have rolled it into a successor of SPY. SPY was too popular to just dump. You have a real knack for getting involved in the ETFs that are cutting-edge: SPY, GLD, leveraged ETFs and so on. What draws you to exotic and new products?

Moriarty: I'm not drawn; it's people who come to me. But I think in part it's because I've done innovative ones already, so people know I'm someone who's used to dealing with not-by-the-book structures.

The other thing is, I'm tenacious. The first leveraged funds took seven years. People know I won't give up, which is important when you're dealing with the SEC. Speaking of that, I've heard something about a comic book …

Moriarty: When we were launching SPDR, my legal assistant took a Spider-Man comic book cover, which was Spider-Man against The Hulk or some other kind of monster, and she doctored it to make The Spider-Woman and the monster [as] the SEC. Do you still see yourself as that scrappy underdog fighting against the SEC?

Moriarty: I never did. Most of the time, I've had very good relations with the SEC. As an agency, I think they do a great job. It's only certain times where I might not share their view about something; and even then I feel not like they're the enemy, but that I need to change their mind. The ETF industry has matured a lot since the earliest days. What is something that’s come across your desk over the past 25 years that’s truly surprised you?

Moriarty: Though I'm no longer representing the Winklevosses, I have to say that the bitcoin ETF caught me by surprise. I didn't see that coming. That was extremely interesting to work on. And others are now working on them as well, and on bitcoin futures trusts. It'll be very interesting to see what happens in that whole space. Are you still working with virtual currency providers to get some sort of exchange-traded product out the door?

Moriarty: I'm working with virtual currency providers, and some of them are thinking about doing an ETF, or something like that. What excites you so much about virtual currencies?

Moriarty: Fundamentally, what really excites me is the blockchain, which is the underpinning of bitcoin. The blockchain just has so many applications to make things quicker, easier and less subject to fraud, especially in the financial industry.

For instance, you could have a mortgage title, and instead of it being in record books in county clerks' offices, you could have it all be on the blockchain. It would be all in one place. You can't change any data once you enter it, so it would be immutable and easily found. It would save an enormous amount of time and money. And there are many, many applications that this [idea] would work for. What's really stopping a blockchain-themed ETF, or a bitcoin ETF, from coming to market? We've seen some filings, but the SEC’s still hesitating about whether to approve.

Moriarty: In turning down the listing rule for the Winklevoss ETF, the SEC said, in effect, the market’s too young and too unregulated.

Normally, when you apply for a listing rule, you have to show the underlying things you're buying are subject to some kind of regulatory control.

For instance, if you're buying a stock portfolio in a regular ETF, the SEC has jurisdiction over all those stock issuers. If they're doing a bond issue, it's still highly regulated. If you're doing a foreign securities trust, the SEC has arrangements with all the big foreign exchanges, so they have the ability to survey how trading is going and make sure there's no fraud going on.

There isn't anything like that with bitcoin. There isn't any regulator to speak of, and there aren't any real regulated exchanges. It's just like the Wild West, and they felt it was too soon to go ahead and promote the product when all the underlying stuff was completely in the air. Isn't that the point of bitcoin though, that it exists outside of and isn't beholden to any particular government's regulatory regime? That gets people excited; that's why many people are investing in it, right?

Moriarty: It's true that that was the original idea of it. The whole idea of a bitcoin ETF was already a strange idea, in that you were creating something highly regulated out of something unregulated.

But then, look at the futures; you've got bitcoin futures coming on board soon [Cboe launched its bitcoin futures Dec. 10], and they’ll be regulated by CFTC. There is beginning to be regulatory overview. The question is whether that’ll continue to be the case, as the industry matures. If bitcoin futures trading is successful and proves itself, could that be the impetus the SEC needs to change its mind about bitcoin ETFs?

Moriarty: I think they’d consider it, but the question is whether they'd think that was sufficient. Because they still would have no input and no regulation on the ultimate coin, which is what the trust would be trading in. I could see, however, a bitcoin futures commodity pool; that I think will happen. So no physical bitcoin ETFs, but maybe a futures-backed one could work.

Moriarty: Yes. Once whoever it is [at the SEC] is satisfied that futures are working properly, I think you'll see at least one, if not more than one, of those coming down the pike. Besides bitcoin, what else are you excited about in the ETF industry?

Moriarty: It’ll be interesting to see how things change when the SEC finally adopts the ETF rule. They've tried twice, and now I think the third time, it may be a go. We hear they're going to introduce a rule for comment in the spring.

That would make it faster to create an ETF, because you won't have to get an [exemptive relief] order anymore. Or, at least, you won't have to get an order for any average transparent index or active fund.

You'd still have to get one for an active nontransparent fund. No one has been given yet for those. But that's interesting, too, because some of those people are continuing to file, and they may be getting close to doing something. Do you think, if the rule goes through, it would become easier for smaller issuers to enter the market?

Moriarty: I do. It would be cheaper, in terms of both time and money. It will free up a lot of staff time that’s been consumed in endlessly cranking out these applications.

Contact Lara Crigger at [email protected]

Lara Crigger is a former staff writer for and ETF Report.