Last month, an application for Bitcoin ETF reached the US SEC office again. CBOE, VanEck and SolidX, the co-applicants this time, individually had faced rejection before. Still, the applicants and a lot of people having a close eye over this event, believe this time SEC’s stance could change. This application was not the first attempt to reach the SEC. It had been rejected before. The applicants too weren’t new to this.
Why were the previous application rejected?
SEC has rejected bitcoin thrice previously but this time things look favorable for a go ahead
The first attempt for the creation of Bitcoin ETF was initiated by the Winklevoss twins in March 2017. They had proposed that the Bitcoin-only fund would trade like a regular stock under the ticker symbol “COIN.” The SEC made a decision to prevent the proposed ETF then as it cited “concerns about the potential for fraudulent or manipulative acts and practices”. So what made SEC reject the bitcoin ETF proposal?
- In Dec 2017 The Chicago Board Options Exchange (Cboe) has filed with the U.S. Securities and Exchange Commission (SEC) to list multiple bitcoin futures ETFs which too had faced rejection.
- In January 2018, The SEC had turned down plans by members of two Wall Street trade groups, Investment Company Institute and Securities Industry and Financial Markets Association to set up exchange-traded funds (ETFs) for bitcoin and other cryptocurrencies. These were rejected again as the SEC that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors.
- Liquidity and notorious volatility of cryptocurrency markets would make retail investor lose their investment were sighted as the main issue. The other issues that were quested were Custody, Security of Assets and potential manipulation
In March 2018, after SEC rejected another two ETF attempts (One being that of SolidX Management – the current co-applicant), The president of CBOE Global Markets, reached to the SEC encouraging the creation of a Bitcoin exchange-traded fund (ETF).
“The Commission should not stand in the way of such ETPs coming to market”
What’s makes Bitcoin ETF proposal different this time
The application put forward by CBOE, VanEck, and SolidX has been prepared considering all the reasons laid by SEC previously. The detailing in which the document is prepared is impressive.
The major reasons seem to all been taken care of.
- As far as protection of retail investors is concerned, the ticket size of investment is set high to keep the product out of reach of very small retail investors. Each share, according to the proposal, would be of 25 bitcoins making it too expensive for a retail investor
- Previously there were no custody services, which Ms. Dalia Blass the Director Division of Investment Management, U.S. Securities, and Exchange Commission had mentioned in the response letter which had rejected the formation of ETF in January 2018. Luckily, custodial services for cryptocurrencies are now available with Coinbase and the Swiss Stock Exchange
- With respect to the Theft due to hack is concerned, the application does mention all bitcoins held by the Trust will be stored using “multi-signature cold storage wallets.” Additionally, “For backup and disaster recovery purposes, the Trust will maintain cold storage wallet backups in locations geographically distributed throughout the United States, including in the Northeast and Midwest.” It has future asserted the security feature by adding an insurance to underlying assets.
It plans to maintain comprehensive insurance coverage underwritten by various insurance carriers. The insurance policy will carry initial limits of $25 million in primary coverage and $100 million in excess coverage, with the ability to increase coverage depending on the value of the bitcoins held by the Trust. To the extent the value of the Trust’s bitcoin holdings exceeds the total $125,000,000 of insurance coverage, the sponsor has made arrangements for additional insurance coverage with the goal of maintaining insurance coverage at a one-to-one ratio with the Trust’s bitcoin holdings valued in U.S. dollars such that for every dollar of bitcoin held by the Trust there is an equal amount of insurance coverage.
“Previously liquidity had also been sighted as an issue. Now with Bitcoin futures have been launched there is a decent volume generated on both CBOE and CME. Even in spot markets across crypto exchanges, the volume seems to be growing.”
What Regulators Think About Bitcoin ETF?
Regulations also seem to be favoring this time which also constituted a major reason for rejection as SEC explained the Bitcoins were unregulated. But now, Bitcoin Futures began trading in CBOE and CME attracting a lot of Wall Street investment banks to the likes of JP Morgan and Goldman Sachs. Also Last month, the SEC itself provided further clarity when it announced that Bitcoin, Ether, and other decentralized cryptocurrencies will not be classified as securities.
Apart from this directly covered points, the macros to have changed now. The world has become more aware of what cryptocurrencies are than what they were last year. With price corrections the speculators seem to have to be in rest, for now, making space for the genuine investors and stakeholders.
The Bitcoin ETF looks a close reality as a lot of points are in favor which previously was not. The decision can be positive this time unless SEC again pulls out some reasons from thin air for not approving the ETF. Let’s wait and watch.
Will the Bitcoin ETF be approved next month? Do let us know your views on the same.