While the interest towards a Bitcoin ETF is growing stronger by the day, the latest SEC’s decision to reject the Winklevoss-proposed rule change casts some light on what potential roadblocks Bitcoin pundits might have to overcome.
The US Securities and Exchange Commission (SEC) formally denied the proposal of the founders of the Gemini cryptocurrency exchange, Cameron and Tyler Winklevoss, on July 26th.
Nevertheless, the Commission’s ruling casts serious light on the matter, outlining the potential roadblocks that future Bitcoin ETF applications need to overcome in order to get the long-awaited approval.
Security Issues: The Need for Custody Solutions
The need for custody solutions has been emphasized more than once. In its ruling, the Commission stated that the Winklevoss-proposed rule change failed “to protect investors and the public interest.”
The point was further reiterated by popular cryptocurrency investor and CEO of Galaxy Investment Partners, Mike Novogratz. He noted that custody is needed and that it needs to come from a “trusting source.”
The most anticipated Bitcoin ETF application, though, may meet these criteria. The CBOE-backed VanEck/SolidX joint Bitcoin-related ETF would be fully insured and physically backed. Both companies noted in a press release:
A properly constructed physically backed bitcoin ETF will be designed to provide exposure to the price of bitcoin, and an insurance component will help protect shareholders against the operational risks of sourcing and holding bitcoin.
Lack of Liquidity
Another major concern that the SEC brought up is the lack of liquidity. This increases the vulnerability of the cryptocurrency markets and paves the way for manipulation induced by sharp price moves.
Yet, Bitwise Asset Management’s Matt Hougan points out that liquidity has improved substantially over the past 12 months and that this trend will only keep on going up. He said:
The entry of folks like Jane Street, Goldman Sachs and Flow Traders will continue to improve liquidity. These are big established flow trading names and as they become more significant the liquidity and price discovery will only improve.
What is more, SEC Commissioner Hester M. Pierce formally dissented against the ruling of the SEC to disapprove the Winklevoss-backed Bitcoin ETF, outlining that they refuse to further institutionalize the Bitcoin market, hence undermining investor protection on their own, She states:
I am concerned that the Commission’s approach undermines investor protection by precluding greater institutionalization of the bitcoin market.
Valuation
Another concern was previously brought earlier this year by the Director of the Division of Investment Management at the SEC – Dalia Blass. She voiced her concerns over the ability of a digital asset-backed ETF to be valued at the end of every business day in a staff letter, noting:
Appropriate valuation is important because, among other things, it determines fund performance, what investors pay for mutual funds and what authorized participants pay for ETFs (and what they receive when they redeem or sell).
The President and CEO of VanEck Associates, Jan F. van Eck, responded that the daily price point would be satisfied by the information provided by two futures contracts – those run by the CME Group and the CBOE Global Markets.
In any case, these are hurdles which may put a damper on the approval of a Bitcoin ETF. However, the one which is applied for by VanEck/SolidX does seem to fall in line with what the SEC is looking for. Unfortunately, we are not likely to see the Commission’s decision on it until early March 2019, as pointed out by legal expert Jake Chervinsky.
This is also the opinion of the founder and CEO of BKCM LLC, Brian Kelly, who said:
I think the likelihood [of approval] in 2018 is low. In fact, I’d be shocked if it was approved this year.
Do you think we will see the approval of a Bitcoin ETF this year? Don’t hesitate to let us know in the comments below!
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