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Bitcoin-backed ETF’s on SEC radar again » Brave New Coin

Yet again, the SEC is seeking public feedback on an application for a Bitcoin-backed ETF (Exchange-traded Fund), that would provide investors with direct exposure to cryptocurrency – rather than just tracking price movements as a derivative.

The call for comment was made in response to a proposal submitted by Chicago-based derivatives exchange CBOE (Chicago Board Options Exchange), which hopes to list shares from the VanEck SolidX Bitcoin Trust.

This is now the third attempt to list the investment vehicle, which is the result of a partnership between money management firm VanEck and blockchain company SolidX. If approved, the trust would hold in their custody “physical” Bitcoin purchased though over-the-counter markets and cryptocurrency exchanges.

A bitcoin-backed investment fund

While the SEC has approved seven blockchain-based ETFs in 2018 so far, ETFs backed by Bitcoin itself have faced significantly more scrutiny, and the SEC has repeatedly called for public feedback on past proposals.

Dalia Blass, SEC Director of Investment Management, published a letter in January that addressed the SEC’s concerns over the funds, citing valuation, secure custody, liquidity, the impact of hard forks, and potential manipulation as potential threats to consumer safety.

Since then, roughly a dozen of these Bitcoin-backed funds have been rejected by the SEC, including proposals by the Winklevoss brothers, who first suggested the idea of a Bitcoin-backed ETF.

Other issuers, like ProShares, have attempted to circumnavigate the concerns of the Securities and Exchange Commission by proposing ETFs that trade Bitcoin futures (which are regulated by the CFTC) rather than the underlying asset itself. These variants have also failed to pass muster with the SEC.

The gateway for institutional money

Naturally, the cryptocurrency community has been watching ETF developments with keen anticipation. If the SEC were to approve a Bitcoin-backed ETF with a secure SEC-approved custody method, then institutional investors would likely have the confidence to invest indirectly in large numbers of coins held by the approved third party.

This would effectively place Bitcoin on global stock exchanges, allowing individuals to invest via their 401k or IRA retirement accounts, and institutions to easily add Bitcoin to their portfolio, pension or hedge fund.

Some in the community have also speculated that the approval would precipitate a massive price movement, allowing hedge-funds and other institutional investors to bring vastly greater trading volume to the markets.

Michael Strutton, CEO at IronWood Research Group, thinks that if an ETF was to be approved by the US Securities and Exchange Commission (SEC), then the product could claim its own small portion of the world equities trading market, attracting at least 24 million new investors and pushing the price of BTC “to at least $26,000 and below $44,000.”

A golden analog?

If Bitcoin is to fulfil the promise of “digital gold”, and become a widespread counterpart to the traditional yellow metal, then an analog can be drawn between the history of gold, and its digital successor.

A quick look at the charts reveals the reason Bitcoin holders are hanging on the approval of this investment product. The first gold-backed ETF was launched in march 2003, and the price of gold has since grown astronomically—from $332 at the time of the launch, to around $1257 at the time of writing.

While other factors might have contributed to the meteoric rise in price, the accessibility and market liquidity that gold ETFs have provided the market has doubtless contributed, representing an easy way for investors to buy gold, even if it is not possible to buy coins or bars due to the costs of storage and acquisition.

The gold-backed ETF made trading gold as easy as buying shares of any stock, turning what was formerly a market for specialists, into a market for everyone. 

For anyone wishing to contribute to the discussion on the rule change, the SEC will accept both email and written messages for three weeks after the filings are published in the Federal Register.

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