Just over a week ago, the VanEck/SolidX proposal to list a Bitcoin exchange traded fund (ETF) on the CBOE was withdrawn from regulatory consideration by the exchange's parent, Cboe Global Markets. It was the most recent blow to crypto investors hoping to gain greater legitimacy for the currently bearish asset class and garner additional uptake from conventional investors looking for a less volatile, lower-risk way to invest in digital currencies.
According to VanEck CEO Jan Van Eck, this latest proposal was withdrawn because of the partial shutdown of the U.S. government. Nevertheless, earlier attempts at similar funds have met with failure over the past few years, even when the U.S. government was fully operational.
The U.S. Securities and Exchange Commission (SEC) is proving to be the major hurdle to the introduction of such a fund, having already rejected nine other applications since 2017. What might it take for a cryptocurrency ETF to finally list on a formal U.S. exchange?
Kyle Cox, CFA, senior investment analyst at Invictus Capital says that despite the recent withdrawal of the Van Eck/SolidX application, he believes it's just a matter of time before a cryptocurrency ETF—in some shape or form—becomes a reality in the U.S. Cox points to Switzerland, where a viable version of a cryptocurrency exchange traded product, Amun Crypto Basket Index (SIX:HODL), is already up and running.
“It should be noted that the approval of a crypto ETP product by Swiss regulators, who have shown a progressive approach to the emerging asset class, means that such a product is already in existence, having been approved and launched in late 2018.”
Cox understands the SEC's caution, however. He believes the regulator brings a high level of commitment to market surveillance and enforcement in order to insure strong investor protections. Based on that, he says, it's somewhat expected that any financial product, such as an ETF that's based on a nascent asset or asset class—such as cryptocurrencies—would need to go through multiple iterations in order to overcome the many hurdles associated with the U.S.'s advanced regulatory environment. Says Cox:
“Without doubt, the SEC’s concern and hesitancy to issue approval for a cryptocurrency ETF certainly has some basis. These primarily center on issues of market manipulation, surveillance and infrastructure, which are all problems associated with an immature marketplace. Fortunately, there are many developments in progress that, in our opinion, will ease these concerns over time. How long this will take is unknown, as there are many components to a well developed market that often require simultaneous development due to the inter-reliance of structures.”
Because the U.S. remains the key jurisdiction for the global proliferation of cryptocurrency ETF products, all eyes remain focused on what it will take to get a cryptocurrency derivative approved there. Chris Wittenborn, head of strategy and business development at Velocity Markets says:
”While the issue of digital asset custody is receiving the lion's share of attention, it's clear to us that regulators are also very focused on market surveillance. We believe, based on their public comments, that regulators are looking for more advanced monitoring solutions than they're currently seeing, including policies and tools to help detect and mitigate market manipulation.”
Many aren't concerned by the recent application withdrawal. John Kramer, a cryptocurrency trader at GSR, a programmatic trading firm for digital assets, believes the event doesn't in any way signal diminished chances for the approval of a Bitcoin ETF.
“VanEck plans to resubmit its ETF proposal, citing the recent ... [it's a] temporary withdrawal. Separately, VanEck has partnered with NASDAQ to deliver a Bitcoin futures product in 2019, with better market surveillance tools in an effort to quell regulators' concerns that crypto markets are actively being manipulated. Presumably, if the government remains open and venues like NASDAQ and ICE’s Bakkt exchange do deliver improved tools for regulators to observe and enforce against manipulative market practices, then a Bitcoin ETF just remains a question of when — not if.”
But how long might this take? Cox won't hazard a guess. He warns that prediction is a dangerous game that most, if not all, get wrong.
"One great example of this was the most recent U.S. presidential election. First, very few analysts saw Mr Trump winning. Following that, very few thought that U.S. markets would actually go up!
More to the point, though, Cox says there are too many factors that have to be resolved before a time frame might become clear, though it doesn't seem this will all be settled in the short-term:
“There are a number of variables, many interrelated, so it's difficult to say when. Included in these are market conditions, which reflect investor propensity, which in turn affects viability and profitability of such products. Despite many temporal factors, the big question is when, but certainly not if. Investors should also be wary of overestimating what kind of watershed effects the approval of a cryptocurrency ETF in the U.S. may have over different periods on prices.”
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