Prospecting for gold


No Stone Left Unturned In Bitcoin ETF Quest

Allon Sinai
03 December, 2018
4 min read

The commissioners of the U.S. Securities and Exchange Commission garner much of the focus in the ongoing quest for an SEC-approved cryptocurrency Exchange Traded Fund (ETF). After all, they are the ones who will ultimately need to vote on the decision, which many experts believe will be the biggest step yet towards the institutionalization of the crypto market.

However, the SEC staff arguably play an equally important role, as their work, and recommendations, are ultimately the basis on which the commissioners make their decisions, which is why last week's meeting between 19 staff members and representatives of the VanEck/SolidX ETF proposal bears such significance.

According to a memorandum published by the SEC two days after the meeting was held last Monday, November 26, seven representatives from VanEck and SolidX, as well as from the Chicago Board Options Exchange (CBOE), met with members of the SEC’s Division of Corporation Finance, Division of Trading and Markets, Division of Economic and Risk Analysis, and Office of General Counsel. The VanEck/SolidX delegation displayed a presentation that attempted to dispel the SEC's doubts regarding the proposed Bitcoin ETF.

Why Was the Meeting Held?

VanEck and SolidX seem to be leaving no stone left unturned in their attempt to receive SEC authorization, with the meeting with the staff coming seven weeks after another delegation held discussions with commissioners Hester Peirce and Elad Roisman. Knowing that the staff, including senior members of the likes of William Hinman, director of the Division of Corporation Finance, play such an influential role, they attempted to convince them that the concerns that were raised in the previous postponements of the ETF have been properly addressed.

What Was Said in the Meeting?

The meeting was closed and the discussions weren't made public, but the presentation provided by the VanEck/SolidX/CBOE representatives was released and discloses their argument. Their main points focused on the comparison between Bitcoin as a commodity and more traditional assets of the likes of gold, silver, and crude oil, who all already have ETFs. They claimed that "similar to gold and silver, Bitcoin derives its value as a 'money substitute'" and noted later on that "similar to commodity futures, the spot and futures prices are tightly linked," which according to the presentation "is evidence of a well-functioning capital market." They estimated that Bitcoin futures products in the third quarter of 2018 reached more than $150M per day, and that is even before Bakkt and Nasdaq enter the market with their products early in 2019. They also addressed the fears that were to be raised by SEC chairman Jay Clayton at a conference one day later, when he said that an ETF will not be approved until it can be proven that it is "free of significant risk of manipulation" and that the risk in trading is that of the "value of the underlying asset and not the risk of theft and disappearance." They explained that Bitcoin is relatively resilient to manipulation, noting that "the linkage between the Bitcoin markets and the presence of arbitrageurs in those markets means that the manipulation of the price of Bitcoin on any single venue would require manipulation of the global Bitcoin price in order to be effective."

What Did the SEC Members Say?

Only those in attendance actually know as the SEC doesn't provide any information, other than a list of its participants, in memorandums. Chairman Clayton did, however, go out of his way to address crypto related matters, notably ETFs, over the past week, going on air with CNBC, appearing on stage for around 30 minutes at the Consensus:Invest conference in New York, and giving an hour-long video interview to New York Times columnist Andrew Ross Sorkin, and all within four days. 

"Our job is not to vote. Our job is to present an even playing field on which other people vote," said Clayton when presented with the possibility that he may hold the swing vote the next time an ETF decision is made by the commission. "That is truly how I've looked at this technology and its effect on the security market. We want to be a fair arbitrator of market rules...Our rules have stood the test of time very well and we should not change them to adapt to technology. Technology oughta be able to fit within our rules."

So, Remind me Again Where we Stand on a Bitcoin ETF?

The next deadline coming up on the VanEck/SolidX proposal is 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. Unlike previously rejected propositions, the VanEck/SolidX fund would be a physically-backed Bitcoin ETF, will also be insured, and will set the initial price of the fund at $200k.

"The SEC’s rejections of the Winklevoss ETP and the nine futures-based ETPs over the summer demonstrated that the SEC still has fundamental concerns about the state of the Bitcoin market (and the Bitcoin futures market)," Jeremy Senderowicz, partner at law firm Dechert, who has presented crypto cases in front of the SEC, recently told, "especially with respect to retail investors, and that those concerns must be addressed to the SEC’s satisfaction. We still remain optimistic that a Bitcoin ETF will be approved eventually, but it is difficult to predict when that might happen."

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