Bitcoin ETF — Questions Arising From Recent SEC Rejection
Over the last few months, the Securities and Exchange Commission (SEC) has reviewed applications to launch an Exchange Traded Fund (ETF) to track bitcoin (BTC) and other digital assets. To date, each time an application has been submitted (three times, twice by the Winklevoss twins), it has been subsequently rejected. This raises many questions.
Last Thursday, the SEC announced that it would reject the Winklevoss’ Bitcoin Trust application by a 3–1 vote. Cameron and Tyler Winklevoss, well known from their legal fight with Facebook, also founded the Gemini exchange. According to the details in the application, the ETF was meant to trade on the BATS BZX exchange, which is in turn owned by the CBOE exchange.
In my opinion, the SEC did not act on behalf of investors’ best interests , shutting out investors who want exposure to bitcoin digital assets — assets whose current market cap is above a staggering $140 billion. Instead of dealing with the challenges in digital assets markets and asking for additional requirements in order to approve this application, they decided to reject it flat out.
Commissioner Hester Pierce was the sole dissenter in the SEC decision and she said, “I reject the role of gatekeeper of innovation — a role very different from (and, indeed, inconsistent with) our mission of protecting investors, fostering capital formation, and facilitating fair, orderly, and efficient markets. Accordingly, I dissent.”
Some of the rejecting majority’s reasons included a fear of bitcoin price manipulation and the fact that more than 75 percent of bitcoin trade volume is from non-American exchanges. In addition, they stated the problematic security of digital assets and investor protection issues.
But this raises a question (several really): How on the one hand can bitcoin futures be traded on the CME and CBOE exchanges, while on the other an ETF proposal to trade similar assets is rejected outright?
Bitcoin Futures
Let’s examine, for a moment, bitcoin futures trading on the CBOE. These futures fall under the CFTC (US Commodity Futures Trading Commission), which has limited statutory authority. The futures are cash-settled contracts based on the Gemini’s auction price for bitcoin, denominated in U.S. dollars. Yes, the one and same Gemini whose application was just rejected by the SEC on the grounds it would be too easy to manipulate BTC prices.
Again, how can bitcoin futures trade on a regulated exchange where settlement price is based on Gemini exchange and while an ETF whose prices are based on those same Gemini prices be rejected? Why are authorities inconsistent here?
Based on my own conversations with high-level position holders at Gemini, there is a high level of supervision to hinder price manipulation and to prevent impact on the futures price settlement.
The 3–1 majority noted that the number of bitcoin futures traded is low — by their estimates, bitcoin futures value at about 20 percent the volume of platinum futures and a mere 2.5 percent of silver futures.
In the graphs below (taken from the CME exchange website), it is abundantly clear that trade volumes — and an open interest in general — for bitcoin futures are increasing every month.
Consider also that the CME last week announced that bitcoin futures have reached a record volume of 12,878 contracts. That is equivalent to 64,390 BTC (as of this writing, about $530 million).
Another reason stated for the rejection was the security of Crypto digital assets. Here it is worth noting that the Gemini exchange keeps most its clients’ digital assets in an offline vaulted storage system (e.g., a “cold wallet”). Only a small amount of digital assets are held in online “hot wallets,” so the risk to clients assets is low.
All customer USD funds are segregated and legally distinct from Gemini business and operating accounts. They are also held in an omnibus account at an FDIC-insured bank. Also the customer’s USD funds are eligible for FDIC insurance, subject to applicable limitations.
Gemini is a New York trust company regulated by the New York State Department of Financial Services (NYSDFS). This reflects the regulation and the security at Gemini and demonstrates that they are taking seriously security issues and keeping clients funds safe. In my opinion this should have sufficed for the SEC.
Wanting Access to the Market
The importance of an ETF cannot be underestimated. As I stated earlier, we need to remember that there are small retail investors who would actually like some exposure to cryptocurrencies. However, the buying process is so complicated that it is an arduous and stifling task. Follow it step by step:
1. First, an investor must wire funds directly to an exchange. Some banks outright ban monetary transfer to such exchanges.
2. After wiring the funds, the most recommended way of storing the currencies/tokens is with a (cold) hardware wallet like Ledger or Trezor, which itself can cost as much as $100, a commitment that might cost more than the minimal amount of bitcoin, ethereum or some other cryptocurrency a small/new investor might buy to get his or her feet wet.
3. Onboarding, or setting up these hardware wallets, constitutes a complicated process for many in and of itself.
4. Tax issues — particularly a lack of clarity on what is taxed, how, and at what rate — are also involved. An investor who buys crypto assets outside of his domiciled country and later decides to sell it may have tax withheld. In addition, he or she will have to report it on an annual tax return. An ETF resolves these issues.
August 16 — a Moment of Truth?
We now need to wait on another pending SEC decision, not expected until August 16, on an application submitted by Van Eck and SolidX. Van Eck manages $46 billion in assets and SolidX specializes in blockchain. Both companies would like to issue an ETF which tracks BTC that would traded at the CBOW BZX.
Until now their application has been rejected three times by the SEC. Hopefully this time their application will be approved because of the special circumstances of this ETF.
1. As mentioned before, Van Eck manages $46 billion in assets. VanEck is an award-winning, widely recognized investment and money manager
2. Their digital assets are insured for up to $125 million (or more as needed) by various insurance companies
3. SolidX holds extensive security and technical expertise in blockchain and cryptocurrencies, a limited resource in the industry that they invested in heavily
4. This ETF is targeting high-net-worth individuals/funds (each share in the proposed ETF will be equal to 25 bitcoins ~ $200,000 USD @ $8000/BTC) and this will not suit retail investors.
If this proposed ETF is approved, it ought to pave the way for more. Regarding the latest rejection, though, I can safely say that the SEC chose the easy way out by not contending with the new challenges posed by digital cryptocurrency assets. This market is only accelerating and should not be ignored. I hope we will soon see approval of an ETF that can finally bring a much-needed milestone for bitcoin and cryptocurrencies in general.
