The Winklevoss twins.


On the Cusp of Trust: Everything You Must Know About ETFs

Allon Sinai
05 November, 2018
4 min read

The quest for a SEC-approved Bitcoin ETF has gripped the ecosystem for over a year now. The direct correlation between ETF denials and delays and the dramatic drops in the price of Bitcoin and other digital tokens has got the market hanging on every announcement coming out of the U.S. Securities and Exchange Commission.

What is an ETF?

ETF stands for an Exchange-Traded Fund and is a financial product that tracks the price of an asset and is listed on an exchange. It allows investors to trade without actually having to buy the underlying asset.

Why should I care?

Bitcoin dipped three percent at the end of July when the SEC rejected a second attempt for a Bitcoin ETF by Cameron and Tyler Winklevoss, founders of crypto exchange Gemini. The world's leading crypto then fell around six percent over a period of 24 hours, less than two weeks later, when a decision on the proposal made by investment firm VanEck together with financial service company Solid X was delayed. That was followed on August 23 by the rejection of nine Bitcoin ETFs from three issuers (GraniteShares, Direxion, and ProShares), decisions which were called back for review one day later. That same day, SEC commissioner Hester Peirce noted on Twitter that the decision to disapprove the proposals would be stayed until the review was completed.

However, the review process has no formal deadline, and it is unclear what, if anything, can change about the SEC's opinion. Notably, under Rule 431 of the SEC's Rules of Practice, a single commissioner can order a review, and it is widely believed that Commissioner Peirce is responsible for the rare move. Peirce was the only commissioner to vote in favor of the Winklevoss Bitcoin Trust, and released a long letter to explain her dissent towards the disapproval one day later.

The SEC has given any party or person to file a statement in support of, or in opposition to, the ETFs until Monday, November 5.

What to look out for next?

Reviews aside, there is only one ETF deadline left, the one many experts believed was the most significant to start with. The VanEck/SolidX proposal has already been delayed twice, with the next deadline coming up on December 29. The SEC still has the option to order one last delay that would push it to a final deadline of February 27, 2019.

The VanEck/SolidX fund would be a physically backed Bitcoin ETF. It will also be insured and will set the initial price of the fund at $200k in order to encourage institutional participation.

The nine proposed ETFs under review, on the other hand, would be backed by Bitcoin futures contracts, which began trading on the CME and Cboe exchanges late last year. The SEC's main reason for initially rejecting those proposals was concerns about manipulation, while also citing the still-small size of the Bitcoin futures market.

How does it work?

The ETF approval process follows a standard formula. After receiving a request for a proposed rule change, the SEC posts notice in the Federal Register and solicits comments. It then has 45 days to approve or deny the ETF, or it can extend the deadline up to three times. The first extension is for 45 more days, the second for 90 days, and the final one for 60 days; all in all a maximum total of 240 days after the completion of the filing.

Anything else on the horizon?

While much of the focus has been on the efforts of VanEck/SolidX, there is another ETF in the pipelines, one which is taking a different approach. Bitwise is still not on the SEC clock as it has yet to officially complete the paperwork, but it intends to request approval for an ETF that would track an index of the 10 largest cryptocurrencies.

There is also a chance that the next big ETF news will come from across the border, with Toronto-based firm Evolve Funds filing with Canadian regulators to be traded on the Toronto Stock Exchange (TSX) under the ticker BITS.

What about Bakkt?

While the wait for a Bitcoin ETF continues, trading in Bitcoin futures will already be widely available from December 12 with the launch of the Bakkt platform belonging to ICE, the parent company of the New York Stock Exchange (NYSE).

While in Bakkt, each purchase of a USD/BTC futures contract will be backed by a physical delivery of one bitcoin in the client’s account at the time of settlement, in an ETF, no actual crypto assets exchange hands.

However, many specialists believe that the launch of Bakkt could also prove to be a major step towards the approval of Bictoin ETFs, as in previous rejections the SEC had explained that the BTC futures market was not yet sufficiently liquid.

cryptocurrency Bakkt ETF VanEck/SolidX