Earlier this month, representatives from options exchange CBOE, fund provider VanEck, and blockchain startup SolidX met with top Securities and Exchange Commission (SEC) brass, and — unsurprisingly — the group’s pending bitcoin ETF application was at the top of the agenda.
Bitcoin Market Reaching Maturity
In the meeting, which was held on Oct. 9, VanEck and SolidX made their case to SEC Commissioner Elad L. Roisman that the agency, charged with supervising the country’s securities markets, should break from its historical stance and allow their bitcoin exchange-traded fund to begin trading on CBOE BZX, a regulated U.S. exchange.
The VanEck-SolidX-CBOE presentation, first uncovered by The Block’s Larry Cermak, depicts a concerted effort to demonstrate to Commissioner Roisman, a Trump appointee who assumed office in September and is viewed as a potentially-friendly voice to the cryptocurrency industry, that the product complies with securities regulations and has been structured to protect investors.
The presentation begins in March 2017, when the SEC rejected an application to list the SolidX Bitcoin Trust on a New York Stock Exchange (NYSE) venue. After reviewing the agency’s justification for disapproving the previous application, the group seeks to demonstrate that changes in both the underlying bitcoin market and the SolidX trust itself warrant an approval on the current application, which is still pending.
CME’s bitcoin futures venue has quietly grown into one of the world’s largest BTC/USD markets.
The past year has seen the cryptocurrency trading market evolve begin to institutionalize, with three Commodity Futures Trading Commission (CFTC)-regulated entities launching bitcoin derivatives in 2017 alone. Though volumes on these platforms were initially small, they have steadily grown throughout 2018, even as activity in the spot markets has taken a steep dive. Last quarter, for instance, CME reported that bitcoin futures trading on its platform rose 41 percent over the previous period.
The applicants further stated that the fund would price shares based on data from over-the-counter (OTC) trading desks, which are supervised by the CFTC, compliant with various AML/KYC/BSA regulations, and “not subject to manipulation in the absence of misconduct by the trading desks themselves.”
Moreover, addressing concerns that the product could be too risky for mom-and-pop investors, VanEck and Solidx structured this fund such that each share represents 25 BTC (~$162,000), pricing the average retail investor out of the market.
SEC Regulators are Moving the Goalposts
Despite this growth in regulated market infrastructure and alterations in the product itself, the applicants argued that regulators had established a moving target for bitcoin ETF approval.
In last March’s disapproval, for instance, the SEC justified its decision by stating that bitcoin is in “the relatively early stages of its development” but that the agency may approve cryptocurrency products in the future if a regulated market of “significant size” develops.
By all accounts, the cryptocurrency market has experienced enormous growth in the year-and-a-half since that decision was levied. Bitcoin, in particular, has made strides as a regulated financial instrument. However, the SEC has not provided an objective rubric for measuring whether those markets are of “significant size,” and the applicants expressed concern that this will allow the agency to change that subjective standard to justify future rejections arbitrarily.
“As issuers, we are concerned the SEC staff have created a moving target in their use of the word ‘significant,’” the group said in the presentation. “The Staff have never provided guidance as to what ‘significant’ means, enabling them to move the goal post indefinitely.”
Finally, in a particularly biting section, the group indicted the SEC for suspending bitcoin ETF applicants in “regulatory limbo” while the amount of unregistered initial coin offerings (ICOs) — many of which the SEC has maintained are illegal securities offerings — now numbers in the thousands and continues to grow on a daily basis.
When Will the SEC Approve a Bitcoin ETF?
While it remains unclear whether Roisman is amenable to arguments in favor of a bitcoin ETF, the agency already has at least one commissioner — Hester Peirce — who is on record in favor of making this type of investment product available through a regulated trading venue.
Even so, most analysts predict that, based on the wording of recent SEC crypto ETF disapprovals, the agency is unlikely to provide applicants with the green light to move forward with a bitcoin ETF listing until at least 2019.