The concept of a Bitcoin (BTC) ETF tends to remain controversial as long as it is not fully approved by the SEC. Yet, the SEC is not inclined to approve it as long as the concept remains controversial.
In this article, not only will we explore how Bitcoin ETFs remain caught in a vicious circle, but also deal with the reasons why the SEC delays decisions on Bitcoin ETF proposals time and again and take a closer look at existing proposals.
Why Bitcoin ETFs are stuck
We’ll address this question in just a minute, but first we have to explain what ETFs are. It will give you a general idea of why BTC ETFs can’t see a light. Yet.
ETFs, or exchange-traded funds, are securities that track a basket of assets, an industry, an index, an index fund, a currency, etc. ETFs are bought and sold just like stocks throughout the day and play an important part in diversifying your portfolio.
Now, what role does the SEC play in approving ETFs as trading assets? Well, everything starts with them. To create an exchange-traded fund, a prospective ETF sponsor files a plan with the SEC.
Once the plan is approved by the SEC, together with an institutional investor, such as a pension fund, the sponsor forms a trust that issues ETF assets. That’s it. The exchange-traded fund is ready to be sold in an open market.
And the first phase of this whole process is exactly where Bitcoin ETFs are stuck. Because companies that propose their Bitcoin ETF products still struggle to get the approval from the SEC.
We can argue the reasons behind those constant approval delays, but here is what Jake Chervinsky, a lawyer and general counsel at Compound, said in the Brian Krogsgard’s podcast: “What is giving the SEC caution towards approval for a BTC ETF is that the SEC is not trying to approve only ETFs that are good investments.”
The expert explained the SEC’s job is to make sure all of the rules are being followed. And one of the rules that has been a problem says fraudulent and manipulative acts or practices are incompatible with the approval.
For all that said, the SEC is concerned about the amount of market manipulation not on the exchange that would list a Bitcoin ETF, but on the underlying spot and derivative markets.
They need more insight on those markets. And until they know what’s going on there, they are not going to approve BTC ETF proposals, Chervinsky supposed.
3 Bitcoin ETF Proposals are still in limbo
Presently, there are three active Bitcoin ETF proposals the SEC is making a decision on. Final decisions on the Bitwise Asset Management and VanEck/SolidX are scheduled to occur on Oct. 13 and Oct. 18, respectively.
The decision on the Wilshire Phoenix is expected by Sept.29.
Recently, SEC Chairman Jay Clayton has said “progress is being made” in the crypto space to allow a bitcoin ETF to launch, although concerns linger.
And here is how existing proposals address them.
Bitwise Asset Management
In their presentation to the U.S. Securities and Exchange Commission, Bitwise Asset Management, provider of index and crypto asset funds, tried and demonstrated how the underlying Bitcoin market is resistant to manipulation and fraudulent behavior.
Their Bitwise Bitcoin ETF Trust will be drawing prices only from 10 crypto exchanges that “have actual volume” - Poloniex, Kraken, Binance, Bitfinex, Bittrex, Bitstamp, ITBIT, Coinbase, Gemini, Bitflyer.
According to the presentation, these 10 exchanges make the Bitcoin market significantly smaller, more orderly and more regulated than commonly understood. Nine out of the 10 exchanges except for Binance are registered as a Money ServIces Business with FinCEN (The Financial Crimes Enforcement Network).
During an interview for Bloomberg UK, Bitwise’s global head of research Matt Hougan said that crypto has focused mostly on retail investors or institutional investors so far. But “a key aspect to a Bitcoin ETF in the U.S. is that it unlocks the financial advisor marketplace.”
If their ETF is approved, the asset will be traded on NYSE Arca, an exchange on which both stocks and options are traded.
As their presentation states, for pricing of the ETF unit, in comparison to Bitwise, VanEck/SolidX will use OTC index, which has several characteristics.
The index is based on the mid-point of bid/ask quotes provided by constituent OTC platforms. Those platforms trade with institutional and sophisticated investors and follow AML, KYC and BSA regulations, among others. Plus, desks and trades are identifiable and accountable to regulators.
This could address the “necessary deterrent to manipulation" described in the March 2017 disapproval notice issued by the SEC.
In the meanwhile, the partners have created an ETP, an ETF-related product that uses an SEC exemption that will allow shares in their VanEck SolidX Bitcoin Trust to be offered to institutions such as hedge funds and banks, but not to retail investors. Not a true exchange-traded fund, the product is similar, though.
If their true ETF is approved, the asset will be traded on Cboe, the largest U.S. options exchange with annual trading volume that hovered around 1.27 billion contracts
What differentiates a New York-based investment-management firm Wilshire Phoenix from other proposals is that their trust would hold bitcoin, short-term U.S. Treasury bills and U.S. dollars.
As their S1 filing states, “while the Shares are not intended to, nor is their purpose to, replicate a direct investment in Bitcoin, they seek to provide investors with exposure to Bitcoin with substantially lower volatility than a direct investment in Bitcoin and without the uncertain and often complex requirements relating to acquiring and/or holding Bitcoin.”
They also added that the combination of Treasury bills and U.S. dollars would reduce overall volatility in the price of the proposed ETF.
To date, the SEC has not approved any crypto ETF yet. But SEC Commissioner Robert Jackson said early in 2019 that he believes an ETF proposal will “eventually” meet the SEC’s standards.
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