Crypto exchange traded products prove divisive, as the SEC mulls over its latest landmark decision.
Exchange-traded products (ETP) are derivatively priced securities that are traded on a national securities exchange. Their pricing derives its value from other investment instruments, most commonly found in the form of commodities, stocks and indexes.
The first global multi-crypto ETP has the backing of Swiss startup Amun AG and will be listed under the ticker symbol HOLD. According to the announcement, the ETP will track five of the sector's biggest cryptocurrencies: Bitcoin (BTC), Ripple (XRP), Ethereum (ETH), Bitcoin Cash (BCH) and Litecoin (LTC).
The announcement also reveals that each of the five cryptocurrencies will obtain a degree of the market share within the ETP, although Bitcoin will reportedly make up roughly half of the ETP’s overall assets. XRP, the now second-biggest cryptocurrency, will make up 25.4 percent of the assets, followed by Ethereum with 16.7, Bitcoin Cash at 5.2 percent and Litecoin with 3 percent.
In spite of many hopeful product launches across the crypto sector attempting to hasten mainstream adoption, regulation issues remain a serious and consistent barrier to progress. Hany Rashwan, co-founder and chief executive of Amun AG, has not overlooked this potential sticking point and maintains that the product will comply with the existing strict policies that apply to all other ETPs.
The listing of the multi-crypto based exchange is not Europe’s first experiment with crypto ETPs. Swedish company XBT Provider has been running the lucrative CoinShares exchange-traded product since 2015. This listing is the latest crypto development in Sweden, a state well known for its open-minded approach to innovation in the fintech sector, as well as a country predicted to become the first “cashless economy.”
Coinshares has two Bitcoin trackers: XBT Bitcoin Tracker One (COINXBT) and XBT Bitcoin Tracker Euro (COINXBE). As previously reported by Cointelegraph, the two trackers trade in both euros and Swedish krona.The product ascribes 200 shares as equal to the price of one Bitcoin for trading in Swedish krona and 20 shares to one Bitcoin for the euro version. The product is accessible to investors from across Europe and has attracted over $1 billion since its 2015 listing on Nasdaq Stockholm, leading developers to launch additional versions in neighboring Denmark, Latvia, Finland and Estonia.
Coinshares caught the eye of billionaire crypto investor Mark Cuban early on. Speaking at the Vanity Fair New Establishment Summit in Los Angeles, Cuban commented on the investing experience and the ascription of asset value:
“It is interesting because there are a lot of assets which their value is just based on supply and demand. [With] most stocks, there is no intrinsic value, because you have no true ownership rights and no voting rights. You just have the ability to buy and sell those stocks. Bitcoin is the same thing. Its value is based on supply-demand. I have bought some through an ETN based on a Swedish exchange.”
The ETF battle continues in the United States
Perhaps the most established exchange-trading method in the crypto world is that of exchange-traded funds (ETF).
An ETF tracks a commodity, bonds, a stock index or one or several assets. Single-asset ETFs are now commonplace and can be used to trade a variety of assets, such as gold. As ETFs are already a major tool for passive investment in mainstream finance, many players in the crypto community hope that ETFs will pave the way toward widespread adoption.
Part of the allure of ETFs that track a basket of assets is that, by their very nature, they are less prone to the risk of fluctuations that other investment instruments are vulnerable to. Because the value of the investment is spread across multiple assets, losses from underperforming assets are counterbalanced by those that more rapidly accrue value. As a result of this, ETFs enjoy popularity among low-risk investors.
A Bitcoin ETF tracks Bitcoin as the underlying asset. This results in the investor only holding the security of the Bitcoin without actually owning the coins themselves. So far, Bitcoin ETF applications to the U.S. Securities and Exchange Commission (SEC) have not been successful. Billionaire twins and major crypto players Tyler and Cameron Winklevoss have had two high-profile applications denied by the SEC so far, the most recent being rejected in July. The rejection was accompanied by a 92-page report on the application that disagreed with the the Winklevoss Bitcoin Trust’s claim that Bitcoin markets are “inherently resistant to manipulation.” In the report, the SEC honed in on this point in particular:
“The arguments submitted in support of this claim are incomplete and inconsistent, and are unsupported or contradicted by data.”
In spite of the repeated setbacks for the Winklevoss twins’ ill-fated applications, the seemingly hardline approach of the SEC has not prevented further applications from being made throughout the year.
SEC mulls over latest ETF application
Earlier this year, investment management firm VanEck and the blockchain technology company SolidX, applied for a physically-backed Bitcoin ETF to be listed on the Chicago Board Options Exchange’s BZX Equities Exchange. The proposal would see each share in the ETF valued at around $200,000, in an attempt to lure in institutional investors.
This tactic could prove to pay off for the two companies, considering Morgan Stanley’s October report that documented Bitcoin’s new potential for mainstream institutional investment. Furthermore, the fact that the ETF is backed by derivatives means that the firms in question will actually hold BTC as opposed to their corresponding value, a factor which may well be important in influencing the way the regulatory decision will fall for the application.
As the SEC decided to postpone their decision in August, the two companies have yet to receive an official reply. Given that, as of Aug. 22, a total of nine Bitcoin ETF applications from three separate applicants have been rejected outright, the drawn out nature of the SEC’s decision making, along with the huge potential for crossing over into the financial mainstream that it brings, the outcome is eagerly awaited by the crypto community. The SEC did, however, publish a memorandum from a meeting about the proposal in October.
The memorandum outlines the past relationship between the two companies and the regulator, taking into account their most recent, ongoing project and the failed SolidX bid for an ETF to be listed on the New York Stock Exchange (NYSE) in March 2017. Also mentioned in the memorandum is the SEC’s reasoning behind the nine previously rejected applications. Two of the applications were made by ProShares, a further five were submitted by Direxion and two by GraniteShares. The SEC took umbrage at the notion that the Bitcoin futures market had “significant” demand and voiced concern at the possibility of “fraudulent and manipulative acts and practices”:
“[...] the Exchange has offered no record evidence to demonstrate that Bitcoin futures markets are ‘markets of significant size.’ That failure is critical because [...] the Exchange has failed to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, and therefore surveillance-sharing with a regulated market of significant size related to Bitcoin is necessary.”
The memorandum also documents how VanEck, SolidX and the representatives of the Chicago Board Options Exchange (CBOE), vehemently disagreed with the regulators on this issue, adding that their choice of the word “significant” was deliberately imprecise and enabled them to manipulate agreements between the involved parties:
“As issuers, we are concerned the SEC staff have created a moving target in their use of the word ‘significant.’ The Staff have never provided guidance as to what ‘significant’ means, enabling them to move the goal post indefinitely.”
In spite of the tough stance the SEC has taken against the previous applications, Commissioner Hester M. Peirce announced that the regulator would once again review them in the future. In a publication that broke from the official standing of the SEC regarding Bitcoin and cryptocurrency in general, Commissioner Peirce claimed that the regulator had overstepped its “limited role” in focusing on the market itself as opposed to the derivative in question:
“The Commission erroneously reads […] the [Securities Exchange] Act, which requires […] that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices…’ [It] focuses its decision not on the ETP shares to be listed […] but on the underlying Bitcoin spot market […] [instead of] the ability of BZX […] to surveil trading of and to deter manipulation in the ETP shares listed and traded on BZX.”
On Oct. 4, the SEC announced that, “by Nov. 5, 2018, any party or other person may file a statement in support of, or in opposition to, the action made pursuant to the delegated authority.”
SolidX, VanEck and the CBOE are not the only ones who predict a more open-minded approach to Bitcoin ETFs. CNBC crypto analyst Brian Kelly believes that Chicago Mercantile Exchange statistics indicate a growing trend toward the derivatives marketplace and a rapidly evolving futures market. Kelly said that this is likely to improve the environment for SEC Bitcoin ETF approvals as early as next year:
“Here’s CME Futures open interest of large holders. [As of] April, you’re starting to see a big increase […] about an 85 percent growth rate. If you extrapolate that out, by February 2019, you’re going to have a very robust market here.”
Not all crypto players, however, share the same bullish approach. Tech entrepreneur, Andreas Antonopoulous, said that, although he expects the SEC to approve Bitcoin ETFs, he does not expect them to benefit the crypto industry in the long term:
"I’m going to burst your bubble. I know a lot of people really want to see an ETF happen because 'to the moon, and lambos,' but I think it is a terrible idea. I still think it is going to happen, I just think it is a terrible idea. I’m actually against ETFs. I think a Bitcoin ETF is going to be damaging to the ecosystem."
Skepticism spreads outside the U.S.
On Nov. 20, the U.K.’s financial regulator, the Financial Conduct Authority (FCA) announced in a speech that it is considering a ban on cryptocurrency derivatives. The regulator stated that this latest announcement was part of its intention to create its “most comprehensive” response to the industry.
Speaking at the “Regulation of Cryptocurrencies” event in London, the FCA executive director of strategy and competition, Christopher Woolard, emphasized that the organization was looking into outlawing derivatives. The ban would also likely include options, futures and transferable securities. Woolard elaborated on how the FCA is concerned about consumer welfare, as well as other issues across the market:
“We’re concerned that retail consumers are being sold complex, volatile and often leveraged derivatives products based on exchange tokens with underlying market integrity issues.”
Light at the end of the tunnel for ETPs
From the mixed bag of comments from crypto players, what appears to be gaining traction is the notion that crypto exchange-traded products are likely to make their entrance into the sector regardless of whether they will actually enrich the cryptocurrency sphere or not. In spite of the progress being made to implement these investment instruments in both Sweden and Switzerland, the real litmus test will be the regulatory decision from the SEC.
Commissioner Peirce’s harsh insider critique of the regulatory body’s past behavior — along with the announcement that the past nine rejections will be re-examined — could signal that fortunes are finally set to change for crypto exchange-traded products in the United States.
As the U.K. works through its latest regulatory quandary, other players maintain that there is a market appetite for Bitcoin ETFs and it is only a matter of time before they are made available.