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Will The SEC Approve A Bitcoin ETF In 2017?

Published 10/10/2017, 02:07 AM
Updated 09/02/2020, 02:05 AM

by Tanzeel Akhtar

Bitcoin exchange traded funds (ETFs) are struggling to get off the ground and receive approval from the U.S. Securities and Exchange Commission (SEC).

Governments and traditional financial institutions are critical of Bitcoin and cryptocurrencies are being scrutinized carefully. In Europe there is currently an exchange traded note (ETN) available via the public exchange NASDAQ OMX in Stockholm.

But clearing the bar in the US has been more difficult. Most recently, the SEC told leading fund management firm VanEck that it will not review the firm’s registration statement for a Bitcoin ETF. VanEck subsequently withdrew its application for the VanEck Vectors Bitcoin Strategy ETF, which would have relied on combination of bitcoin funds and futures as its components.

This past summer, REX Shares, a Connecticut-based fund management firm with a "focus on delivering new alternative ETPs (exchange traded products)" filed to begin trade on two new actively managed funds, the REX Bitcoin Strategy ETF and the REX Short Bitcoin Strategy ETF. Both funds would use bitcoin futures as their basis, but just last week REX withdrew their filing.

More recently, Grayscale Investments LLC said Intercontinental Exchange's NYSE Arca exchange also withdrew a request to the SEC to list its Bitcoin Investment Trust (OTC:GBTC) which currently trades over the counter (OTC), meaning not via a major, centralized exchange. It launched in 2013. In general, OTC exchanges are less transparent and have looser regulation, making them potentially riskier trading environments.

There is currently limited Bitcoin exposure available via a conventional exchange through Ark Invest's ARK Web X.0 ETF (NYSE:ARKW). The fund, however, is not a conventional Bitcoin ETF. Rather, it offers exposure to Bitcoin within what it calls a 'wrapper.' Put simply, ARKW is "a global equity fund that hones in on next-generation Internet-linked companies," forward-looking potentially disruptive companies with an Internet focus. Bitcoin is thus just one component of the fund, therefore the 'wrapper' designation.

The application by Tyler and Cameron Winklevoss to launch a Bitcoin ETF (ticker COIN) was also rejected earlier this year. As reported here, in July the brothers have reapplied for approval. They're still waiting for a full review.

BlackRock iShares Critical of Bitcoin ETF

On October 3, at a Bloomberg event in London, Mark Wiedman, who serves as Global Head of iShares and Index Investments for BlackRock, said of the idea of a bitcoin fund:

"I don’t quite get the point of a bitcoin ETF in any case, because we’re talking about...trading products that are difficult to access. If bitcoin is ever successful – and again not my thing but – I wouldn’t recommend it. But if it were [successful], why would you need an ETF to access it?”

Angus C de Crespigny, the EY Americas blockchain strategy leader for financial services tweeted in response:

Conversely, blockchain thought leader and CEO of Polymath, Trevor Koverko said he is all for a Bitcoin ETF. According to Koverko, in order for Bitcoin and other Blockchain tokens to go mainstream, they must become accessible to the average trader or investor. Bitcoin ETFs will become an important bridge between the masses and blockchain, he adds.

BlackRock Will Miss Out

Says Koverko:

“ETFs allow investors to easily own a piece of a basket of securities and it's unfathomable to ignore the vast potential of average investors gaining exposure to Bitcoin via ETF’s, especially given the phenomenal rise of the digital currency this year, and its current standing as the highest performing currency in the world four of the past five years. If BlackRock fails to understand this, they will miss out on this unstoppable megatrend.”

Laurent Kssis, Managing Director of XBT Provider, the Swedish company that actually launched the first Bitcoin ETN, and now a CoinShares Company, explains that the SEC has been fairly clear about its stance in recent months.

“Until there is a professional grade futures market which has the liquidity and depth to supporting the hedging activities of a US based bitcoin ETF issuer, they will likely not be approving applications. So we are not surprised to see this withdrawal.”

Kssis acknowledges that this must be “frustrating to US investors” as much of the rest of the world has access to exchange traded products that provide exposure to Bitcoin.

He also provides a rationale for why there could be serious demand for a cryptocurrency fund traded in the US. "There are usually three fundamental reasons why clients enjoy using our bitcoin ETN as a tool to gain exposure to the price movement of bitcoin," he says:

  1. Access: An investor can use their normal broker/brokerage platform to invest.
  2. Advantageous Fiscal (Tax) Treatment: In some countries, such as in the UK where investors can invest via a SIPP (Self Invested Pension Plan), an investment in bitcoin exposure will receive different tax treatment than normal investment (in the case of any gains realized, a lower tax compared to owning bitcoin outright and selling it for a gain).
  3. Security and Storage: As a professional group, we are responsible for the security and storage of any bitcoin - meaning the client, who may not want to become an expert in this, does not have to concern themselves with ensuring world-class security for their investment.

Good Reasons SEC Has Turned Down ETF Applications

Bharath Rao, CEO of of digital currency trading platform Leverj believes the SEC has been turning down applications for a Bitcoin ETF for some very solid reasons, at least from their perspective.

Says Rao:

“Bitcoin is correctly defined as a commodity and ETFs on other commodities such as gold are fairly standard. An ETF may choose to buy and hold the physical commodity held by themselves or a custodian. A cheaper alternative is to buy futures to back the ETF. A Bitcoin ETF that holds actual bitcoins is more likely to be approved than one that holds futures. This is because a regulated bitcoin futures market with sufficient history does not yet exist.”

Bitcoin ETF is Anticipated...Eventually

Rao continues:

“Even a Bitcoin ETF with actual bitcoin is problematic without necessary operational readiness. The ETF would need to ensure that the coins cannot be lost or stolen and the shares issued reflect the amount of bitcoin held.

This could be accomplished using multi-signature accounts with on-chain proof-of-audit. Eventually, these pieces will fall in place and an ETF could be approved. The advantage of holding a 100% backed ETF over actual bitcoin are minimal, since bitcoins do not have the transportation, security and storage costs of Gold or other commodities. However, a Bitcoin ETF is anticipated by the community as an endorsement and a fresh influx of capital, increasing value of each coin."

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