Will a Bitcoin ETF Really Get Approved in February?
I believe the industry is putting too much weight in the Bitcoin ETF. The premise behind it increasing adoption of cryptocurrencies is a fallacy as it doesn’t enable end users to hold, use or become acquainted with the underlying technology.
That being said, I also doubt the SEC will approve the Bitcoin ETF in February due to the numerous market structure limitations they have cited.
- Market surveillance
- Price transparency
- Manipulation
- Security
Market Surveillance
This is a general term that SEC Chairman Jay Clayton referenced when speaking of the Bitcoin ETF denial. Surveillance refers to policies and procedures that exchanges implement to ensure a level playing field. Exchanges utilize surveillance to detect foul play, manipulation and errors in its systems. Most exchanges aren’t utilizing the same standards of technology that are commonly found within the equity markets. However, Gemini is one example of an exchange that is going the traditional route and contracted Nasdaq for their SMARTS Market Surveillance system. As time goes on, I expect we will see more exchanges (both foreign and domestic) begin implementation of systems similar to Nasdaq’s as the space matures.
Price Transparency
It is a widely known issue that pricing for Bitcoin (and alts) can vary wildly from exchange to exchange. The reason for this is fragmented liquidity. In the equity markets we have a mature financial services infrastructure that has worked to bridge liquidity across the globe over the last 200+ years allowing for clear and transparent price discovery. Traditional markets leverage a brokerage model that allows for routing of customer trades to the best price execution. This infrastructure currently doesn’t exist in the cryptocurrency space causing orders to be trapped on the exchange they are placed. For instance, a trader on exchange A only has access to that exchanges pricing. If a better price exists on exchange B, they wouldn’t be able to easily access it. The trader would have to transfer their assets to exchange B and hope the better pricing is still available once their funds settle.
Solutions like 1Konto are taking the first steps to consolidate liquidity and automatically route orders to the best price. This will also provide a full view of market price and transparency. Solutions like this will increase investor confidence to know they are receiving the best price upon placing their order.
Manipulation
When information is opaque, there is room for manipulation. The SEC has sighted this as a reason for prior ETF denials. The manipulation in the markets were also discussed by the New York Department of Financial Services (NYDFS), specifically front running, quote stuffing, wash trading etc. These methods can inflate volumes on the exchanges and also ensure that traders aren’t receiving the best price. While it isn’t 100% proven that these abuses are occurring, it is currently impossible to prove they aren’t occurring. And it is for this reason that the SEC has been cautious in approving the Bitcoin ETF. They want to ensure that the market is fair and competitive especially when increasing access and assets that are based on the underlying BTC contracts/trades.
Security
The Chairman also addressed the many security concerns that are pervasive in the cryptocurreny markets. Unlike traditional markets, cryptocurrencies can be transferred via hacking comparatively easily. With traditional assets, there are clear custody and clearing procedures in place that ensure every asset is accounted for and delivered to the appropriate destination. While this system is slower (2 day settlement) it is more accurate. It is rather difficult for a user to simply send their Apple stock from their account at Fidelity to a random persons account at E-Trade. Even if this mistake did occur, the transaction is relatively easy to reverse. In the digital asset space, there are no checks and balances and no recourse if a user send their Bitcoin to an incorrect wallet address.
Taking security one step further, there is a well know string of exchange hacks since Bitcoins inception. These hacks, combined with no clear custody/clearing solutions recognized by the SEC are the cause of worry among policy makers. While there are a number of companies attempting to solve the custody/clearing issues (PrimeTrust, Coinbase, BitGo and Gemini Custody etc.).
Many of the above are ‘qualified custodians’ for traditional or digital assets and are leading the way to bringing security to the cryptocurrency industry. It is my hope that the SEC becomes comfortable with these digital asset security methods to allow the formation of not just ETFs, but also the much needed infrastructure to help the cryptocurrency ecosystem grow.
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About 1Konto
1Konto (German for “one account”) is in process of becoming the first to connect traditional and digital assets through one-click trading. We focus on increasing adoption of digital assets, reducing friction in ownership and bridging the new crypto world and the traditional financial markets all at the best price via our proprietary algorithm.
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