Why is SEC still keeping CBOE’s Bitcoin proposal on the table?

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Why is everybody having their eyes on Bitcoin ETF's final decision?

For the time being, institutional investors are restrained from entering cryptocurrency market due to lack of legal framework and fear of volatility. To be specific, they are afraid that if their huge capital pour into this “tiny pond”, they will achieve a similar effect as a tsunami in the ocean whenever they take actions. Besides institutional investors like investment funds, pension funds, insurance firms are strictly regulated.

Bitcoin ETF will be a safe entrance for them to get their portfolio exposed to the cryptocurrency market because ETF is a standardized investment vehicle listed on regulated exchanges.

However, the cryptocurrency market is considered as not mature enough to meet SEC’s requirements on custody services and security. Without these high quality services, crypto market cannot support such a highly standardized product like ETF.

In July 2018, SEC rejected Winklevoss application for a ETF tracking bitcoin on Bats BZX Exchange (BZX) due to several reasons:

  • Winklevoss couldn’t provide any security methods to protect investors from market turmoils.
  • Winklevoss couldn’t persuade SEC that they can maintain a sufficient liquidity for the ETF as their one and only liquidity provider is their own exchange. Gemini exchange covers only 0.21% of global bitcoin transactions with daily volume of around $23 million, according to coinmarketcap.
  • SEC is still concerned about the risk of manipulation under wild volatility. To be honest, the cryptocurrency market is way too small compared to the forex market and equity market; therefore, it is more susceptible to malicious activities.

bitcoin etf, sec, cboe, winklevoss, bzx, gemini exchange, VanEck SolidX Bitcoin Trust, Genesis Global Trading, Finra

However, Commissioner of SEC Hester M. Peirce  expressed her dissent to this rejection in a statement on SEC website. She stated that the Commission had lost the point when they applied Exchange Act 1934 to the underlying bitcoin market instead of the ETF shares.

“The disapproval order focuses on the characteristics of the spot market for bitcoin, rather than on the ability of BZX—pursuant to its own rules—to surveil trading of and to deter manipulation in the ETP shares listed and traded on BZX. Section 6(b)(5), however, instructs the Commission to determine whether “[t]he rules of the exchange” are, among other things, “designed to prevent fraudulent and manipulative acts and practices [and] to promote just and equitable principles of trade,” and “are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers.”[3] It says nothing about looking at underlying markets, as the Commission often has done in its orders.” from sec.gov published on Jul 26th, 2018

The divergence among SEC might be one of the contributing factors to their delay on CBOE’s proposal.

What makes CBOE’s Bitcoin ETF different from others?

CBOE BZX Exchange is one of stock exchanges under CBOE which is filing for ETF license. They are asking for permission to list SolidX Bitcoin Shares issued by VanEck SolidX Bitcoin Trust on BZX Exchange. Community is anticipating the successful combination of high profiled financial firms like CBOE and VanEck.

General information

  • Certificate: SolidX Bitcoin Shares.
  • Listing exchange: CBOE BZX Exchange.
  • Issuer and custodian: VanEck SolidX Bitcoin Trust.
  • Trust’s Manager: SolidX Management.
  • Trust’s Administrator & Cash Custodian: BNY Mellon.

SEC might be convinced by several aspects:

  • VanEck is an accredited investment management firm based and established in New York in 1955.
  • CBOE is well-known for their careful consideration whenever they push something forward. No wonder why they usually got SEC’s approval.
  • VanEck SolidX Bitcoin Trust will set some limits on participation by issuing each ETF share holding 25 bitcoins. This threshold will discourage retail investors from entering the big game. Frankly speaking, prohibition is sometimes a good protection.
  • The Trust will have two insurance reserve funds, namely primary coverage $25 million and excess coverage $100 million in order to cover their convert ratio during market turbulence.
  • The ETF’s NAV will be determined based on the MVBTCO Index which tracks prices from several OTC platforms, instead of calculating solely on Gemini Exchange like in the Winklevoss ETF case.
  • For custody services, one of CBOE counterparties is Genesis Global Trading - the only one which holds FINRA license under SEC’s regulation.

Although CBOE’s application is more comprehensive than the Winklevoss ETF, it might not be enough to get the green light from SEC. Major concerns still remain.

Crypto market is a highly sensitive market in which fake news easily cause FOMO and FUD effects. Historically, bitcoin price have suffered from significant corrections since its birth in 2008 due to market rumours.

bitcoin etf, sec, cboe, winklevoss, bzx, gemini exchange, VanEck SolidX Bitcoin Trust, Genesis Global Trading, Finra
A History Of Bitcoin Price Collapses Over the Years from CNN

Anyway, the final decision is in the hands of SEC. They have delayed their judgment for the first time until September 30th. They reserve the rights for further delay of 90 days from filing the proposal, 180 days, and then final 240 days. CBOE proposal was published on SEC website on July 2nd, 2018, so SEC must announce their final word by February 27th 2019.

We believe that SEC cannot reach a consensus until February of the following  year.

New update on September 20, 2018: SEC informed further postpone to December 29th, 2018 and called for public comments on CBOE's file

From nami.today

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