Industry Updates

Inside ETFs 2018: Bitcoin ETFs hit SEC roadblock

Scott Longley

The charge towards bitcoin ETFs being launched in the US has hit a substantial roadblock after the SEC published an open letter questioning various aspects of their suitability, according to a legal expert who has advised potential bitcoin-based funds on their applications.

Speaking at the Inside ETFs conference in Florida yesterday, Jeremy Senderwicz from US law firm Dechert who was an adviser to the proposed SolidX bitcoin ETF said the public nature of the SEC's queries indicated the level of the watchdog's fears.

"For the SEC to come out with these concerns in such a transparent fashion demands a very robust response from the industry," he told the audience. "They want to hear from the investment industry as a whole and basically the underlying market for bitcoin has to evolve a lot for them to be comfortable with this."

The session was taking place in the wake of the SEC's intervention on Thursday last week where is raised concerns over the safety if bitcoin-based investments.

The SEC was a response to the wave of proposed bitcoin-based ETFs that have been proposed by many groups since the futures exchanges in the US launched bitcoin-based futures at the tail end of last year.

While the letter from Dalia Blass, director for the division of investment management at the SEC, said it was aware of the "potential benefits" of cryptocurrencies as detailed by proponents, it added that critics of the form have countered with various concerns around transparency of information, trading and valuation.

Said Blass: "In light of these considerations, we have, at this time, significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of (the SEC's) rules."

The letter to two US investment trade bodies posed a series of questions that were grouped around issues of valuation, liquidity, custody, arbitrage and potential market manipulation.

Fundamental to the first issue is whether any of the proposed funds would have the information necessary to adequately value cryptocurrencies bearing in mind the volatility, fragmentation and lack of regulation that surrounds cryptocurrency markets. The SEC also noted the "nascent state and current trading volume in the cryptocurrency futures markets."

Senderwicz suggested the nature of the SEC's questions indicated that the volatility that has affected the price of bitcoin remained a large issue. "A lot of the questions were about making that point," he said.

"There are two things there; from the (SEC's) requirements, fund boards have to have final responsibility for valuation, including adjustments when there is a significant event in the underlying market. Funds will have to figure out how they can value outside events."

"The fact that they are asking those questions indicates that they doubt that the answer is yes to the questions."

When it comes to the futures markets, Senderwicz suggested SEC letter had raised the question of how funds would deal with the problem of funds dominating those futures markets. "Liquidity might be more illusory than in actual fact," he said.

"The relationship between futures and cryptocurrencies might be too good," he added. "When they first came out in December, that was viewed as a potential game changer. Not just the means for a futures-based ETF, but also for physical cryptocurrency funds, it would provide an opportunity to manage risk."

However, he noted that the SEC was clearly "not convinced."

As for the next steps for those hoping to promote bitcoin ETFs, Senderwicz suggested the "ball was now in the industry's court." "Some of the questions (in the SEC letter) are answerable - and there have been discussions with the SEC - but the other part of it is what happens with the bitcoin market itself. The best answers around technical valuation will mean nothing if the market continues to be somewhat crazy volatile."


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