Bitcoin: ETF Dream Deferred

Late
on Friday, the SEC rejected an application from Winklevoss
Bitcoin Trust for what would have been the first exchange-traded fund that
tracks Bitcoin. The highly anticipated announcement ended plans to list and
trade shares on the Bats BZX Exchange Inc. The SEC was worried about the currency’s
vulnerability to manipulation and the feasibility of surveillance. Bitcoin dropped “12.3 percent to $1,069 following the
news from the SEC”. It seems, however, to have no trouble recovering from the
stumble. This rejection denies many investment institutions the opportunity for
more direct exposure to the dynamic currency.

Specifically,
the SEC expressed concerns that the proposed activity of the ETF would have
fallen short of compliance with Section 6(b)(5) of the Exchange Act and
rejected a proposed rule change. The SEC was worried about the currency’s
vulnerability to manipulation. The regulatory commission specifically called
out two major, interrelated drawbacks about oversight and fraud prevention:

• “The significant markets for Bitcoin
  are unregulated”
• The lack of ability to “enter into,
  the type of surveillance-sharing agreement that has been in place with respect
  to all previously approved commodity-trust ETPs.

The
planned ETF classified Bitcoin as a commodity, rather than a currency, with
shares representing 0.01 BTC. The shares would have tracked the price of bitcoins
on the Gemini Exchange, owned by Gemini Trust LLC. Bats BZX was set to
collaborate with the Gemini Exchange to monitor the Winklevoss Bitcoin ETF in
the same way the exchange keeps an eye on derivatives trading. The Gemini
Exchange has been authorized to trade digital currency for two years by the NY
State Department of Financial Services (NYSDFS). Also, last May, the NYSDFS
gave its approval for the Gemini Exchange to trade
Ether, a new and promising cryptocurrency.

Multiple
companies submitted Bitcoin ETFs proposals to the regulatory approval process,
including one from SolidX Bitcoin Trust, from SolidX Partners Inc, a blockchain
technology services company. Tyler and Cameron Winklevoss, famous for their lawsuit 
against Mark Zuckerberg, which alleges he stole their idea for Facebook,
were the first to submit a proposal for an ETF. Their plan for
The Winklevoss Bitcoin ETF [Winklevoss Bitcoin Trust (COIN)] had been pending three
and half years ago, and experienced more than one decision delay. In the
interim, the SEC noted and avowed tighter regulatory surveillance to keep
abreast of the burgeoning ETF market, now valued over US$3 trillion in net
assets. 

The
recent trend to increase transparency for Bitcoin has grown in accordance with
interest in trading. Chicago Mercantile Exchange, the leading derivatives
marketplace, successfully launched two new tools last November,
the CF Bitcoin Reference Rate (BRR) and CME CF Bitcoin Real Time Index (BRTI).
The BRR “aggregates the trade flow of the major bitcoin spot exchanges during a
specific calculation window into a once-a-day, transparent reference rate of
the US dollar price of bitcoin”. To do this, CME works with several bitcoin
exchanges and trading platforms such as Bitfinex, GDAX, itBit, Kraken, and
Bitstamp.

 What’s Next?

Bitcoin’s
future faces other challenges, including piracy and liquidity risk. Unique partnerships, such as the one
between Polychain Capital and venture capital players, Andreessen Horowitz and
Union Square Ventures, are forming to seek the rewards in the risk. Also, Blockchain, the technology
behind Bitcoin, is making inroads in other areas of business, including shipping logistics, manufacturing and more.

Cryptocurrencies
are decentralized global digital currencies that provide relatively more secure
and efficient means of payment and offer. The underlying technology makes
tracking assets and transactions more secure. These advantages are attractive,
of course, to banks and other financial institutions. But will major industry
players continue to race to prepare for a future defined by this new asset
class? Only time will tell.

 By
Tasha Williams