If you’ve never had a friendly sparring match with the Securities and Exchange Commission, you can be forgiven for underestimating them. But I’ve worked with regulators on more than 80 exchange-related products over 14 years — so I’ve learned not to.
Back in 2006, when I worked for Barclays, some colleagues and I sought and obtained a no-action letter from the SEC to allow us to list and trade the first exchange-traded note (ETN). We then launched the iPath platform, creating over 30 innovative products including DJP and VXX. In 2009, I co-founded and served as CEO for VelocityShares, which was acquired by Janus in 2014. I have also served as head of exchange-traded products at Credit Suisse and as head of product development at Global X Funds. As founder and CEO of REX Shares, my firm was among the first to file with the SEC for Bitcoin-related ETFs in 2017.
So when it comes to a Bitcoin ETF getting approved, here is what I can tell you: The SEC doesn’t really care about where you worked or how you dress.
Bill Barhydt, chief executive of Bitcoin payment startup Abra, recently told CNBC that he thought the SEC was denying ETF applications because the people filing those applications “don’t fit the mold of who the SEC is used to approving,” while mentioning that he previously worked at Goldman Sachs.
Don’t believe that for a nanosecond. It’s an easy way to rationalize away the valid rejection of products that are unfortunately “not yet ready for prime time.” In the evolution of ETFs that I have observed and actively participated in since 2004, there have been many new and innovative products proposed by small entrepreneurial companies who “don’t fit the mold” that have gained SEC “approval,” so to speak (it is technically incorrect to say the SEC has “approved” a product).
What The SEC Wants
The SEC has been very consistent in telling cryptocurrency innovators what they will be looking for in ETF applications. The trade-based media seem to have a deep sense of amnesia about those required criteria. They seem to hype every new application and then every new rejection (sometimes prompting unnecessary rallies or sell-offs in cryptocurrencies, which add to volatility).
To make it simple and clear, here is what the SEC is focused on: 1) removing or mitigating the potential for fraud or manipulation in Bitcoin or Bitcoin derivatives, 2) robust custody solutions, and 3) liquidity — meaning a market of sufficient size to support public trading of this asset.
Included in the above are some very technical issues related to pricing. For example, an equity ETF’s net asset value is typically struck by the closing price of all the instruments (e.g., stocks) in the fund. But what if there is never a close? Bitcoin trades 24/7/365 on a global network of computers. There is no “closing price” for Bitcoin.
How does one address that complex issue? One example of an approach can be taken from the current ETF application from VanEck/SolidX. In this application they propose that the closing price be set at 4:00pm ET by the MVBTCO Index—which uses a “proprietary methodology,” averaging bid/ask spreads across several over-the-counter (OTC) platforms. There is a cascade of other potential valuation approaches, should the first one fail, ending with: “the Sponsor will use its best judgment to determine a good faith estimate of the bitcoin Market Price.” We suspect this may not provide the SEC with enough comfort.
A second issue that needs to be solved involves exchanges sharing information with each other. The SEC knows it can never prevent 100% of fraud or manipulation out there. Just think about all the insider trading cases over the last several years. It happens. What they need to be able to do, though, is figure out who was behind a trade or set of trades if they have reason to believe something is wrong.
This is pretty challenging with bitcoin. According to CoinMarketCap.com, Coinbase Pro, our largest homegrown U.S. Bitcoin exchange, still only placed 18th overall in terms of 30-day global volume recently. So, in the case of a Bitcoin or Bitcoin futures ETF, trading in instruments that can affect its price happens all over the globe. Without a number of “information sharing agreements” among a significant proportion of the various exchanges, the regulators would have limited visibility into trades that happen outside the scope of their jurisdiction.
A Bitcoin ETF Application Will Eventually Win Approval
All that being said, we do think Bitcoin ETFs will be approved one day. It is a question of when not if. The market is slowly evolving toward solving the concerns the SEC has outlined. For example, there are high hopes for what BAKKT may bring to the market in terms of regulation, custody and liquidity. This will help. But until such time as there is regulated trading of Bitcoin itself in markets of “significant” size, and/or information sharing agreements to provide visibility to regulators, there will be no Bitcoin or Bitcoin futures ETF in the U.S.
So, when assessing the likelihood of a Bitcoin ETF approval, don’t rely on inflated headlines, or random judgments about “who fits the mold.” Instead, look at the overall development of regulated venues for Bitcoin trading, the increases in liquidity and volumes, and the willingness of exchanges to work together. But, just in case I’m wrong on this thesis, our CFO is a Goldman guy.
Greg King is founder and CEO of REX Shares, Sponsor of the REX BKCM ETF.