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What an SEC Bitcoin ETF Rejection Review Really Means

The U.S. Securities and Exchange Commission (SEC) announced Thursday that nine bitcoin exchange-traded fund (ETF) disapproval orders are to be stayed until further review.

Referencing Rule 431 of the Commission’s Rules of Practice, the SEC said in a series of letters that it would reconsider the three rejections made by the U.S. regulator’s staff.

But what does it mean when the Commission says it will “review” the disapproval orders? And what implications does that decision have for the proposed bitcoin ETFs themselves?

According to the Rules of Practice, the Commission may effectively “affirm, reverse, modify, set aside or remand for further proceedings, in whole or in part,” which technically means the end of this batch of bitcoin ETFs is not final.

Jake Chervinsky, a defense and litigation lawyer for Kobre and Kim LLP, told CoinDesk the petition for review was likely “initiated by a member of the Commission” as no indication on the SEC’s web page points to action taken by either of the two exchanges responsible for the ETF filings – the Chicago Board Options Exchange (Cboe) and New York Stock Exchange (NYSE).

In effect, it only takes the vote of one Commission member to start a petition for review, and as indicated in the Rules of Practice, once granted, “the Commission shall set forth the time within which any party or other person may file a statement in support of or in opposition to the action made by delegated authority.”

With further commenting underway, as Chervinsky points out, the specific body responsible for gathering the additional information and ultimately setting the record straight is now the three SEC commissioners and Chairman Jay Clayton.

And, perhaps most notably, the SEC leadership only just recently issued a decision following a separate review of a past bitcoin ETF rejection for the proposal by investors Cameron and Tyler Winklevoss.

Past example

The Winklevoss bitcoin ETF was denied initially in March of last year, seemingly ending a multi-year effort to create a “physically” backed bitcoin fund into which investors could buy stakes.

After the SEC’s staff pushed back against the idea, the Bats BZX exchange, which filed the proposed rule change allowing for the bitcoin ETF,  petitioned for a review.

More than a year after the review began the SEC’s commissioners came to the decision that the ruling to disapprove would not be overturned, affirming “BZX has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5).”

At the time, Commissioner Hester Peirce wrote a letter of dissent disagreeing with the outcome of the review. Her arguments – that the SEC should be focused on disclosure rather than playing “gatekeeper” to the market – will likely be raised again during deliberations on the current set of bitcoin ETF proposals put forth by Direxion, GraniteShares and ProShares.

Past reviews have taken anywhere between six to 16 months, Chervinsky affirmed, and the Rules of Practice do not set a strict deadline for the SEC, making it “hard to predict” how long this particular review will take.

Chervinsky told CoinDesk:

“Given the nature of yesterday’s decision and the fact that the commissioners so recently handled the Winklevoss appeal, I don’t think it will take long to finish this review.”

Regardless, the announcement of the review was largely well-received by individuals such as GraniteShares CEO Will Rhind, whose firm is now among those waiting for a final answer from the SEC’s highest ranks.

“It’s a positive development and we look forward to engaging with the SEC commissioners on this matter,” Rhind told CoinDesk.

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The SEC Is Weighing a Bitcoin Futures ETF – Here's What That Means

The U.S. Securities and Exchange Commission (SEC) will decide on two proposed bitcoin exchange-traded funds (ETFs) this week – but what are they weighing exactly?

ProShares, the tenth largest provider of ETFs according to CNBC, has two proposals in the running, both based upon bitcoin futures contracts approved by the Commodity Futures Trading Commission in 2017.

What’s more, this impending decision comes at the heels of a more recent ruling by the SEC to delay (until September, if not longer) their determination on a physical-backed bitcoin ETF put forth by VanEck and SolidX.

The distinction between the two, a physical and futures-backed ETF, is worth unpacking to understand the ProShares proposal –  aside from whether bitcoin ETFs should or shouldn’t be approved in the U.S. – centers on which among the two actually has a better shot at SEC approval.

What’s a bitcoin ETF?

To recap, all ETFs trade like stocks, on stock exchanges, but without the same degree of risk.

Due to their design, they’re often a favored instrument for those who want to diversify their investments, offering exposure that’s closer to what you would see in an index fund.

This is because, when you’re buying a share of an ETF, you don’t actually own the underlying shares of the asset (in this case bitcoin). Instead, you own a piece of the fund and how the fund is structured and where the money goes.

“Part of the money when you buy a fund goes to pay for the company that set up the fund and manages the fund. It’s the fund’s money, and the fund owns these assets and, by definition, the fund,” Eric Ross, chief strategist at Cascend Securities, explained.

With a physical-backed bitcoin ETF, investors can effectively participate in the crypto market without being in direct possession of any coins, thereby avoiding some of the risks associated with handling bitcoin private keys (the pieces of information required to actually transfer bitcoins).

Futures-backed bitcoin ETFs take this level of separation one step further by basing the shares in the fund on bitcoin futures contracts as opposed to actual bitcoins themselves.

A futures contract sets a fixed price and date to trade an asset. As such, depending on an investor’s outlook on how the markets will move over time, he or she can buy contracts at varying prices to reflect that outlook and, if correct, make returns on their investment.

In this way, certain futures-backed bitcoin ETFs can indeed prove profitable for investors even if the bitcoin markets are looking bearish. Additionally, holding futures contracts with set prices and expiration dates hold lower degrees of risk given that the company issuing bitcoin ETFs wouldn’t have to make efforts to safeguard any bitcoin assets from theft or hack.

‘Physical’ vs futures

As a result then, it doesn’t come as much of a surprise that among the 10 bitcoin-related funds that are concurrently undergoing review by SEC officials in the next two months, only one is a physical-backed bitcoin ETF, suggesting most companies are placing their bets on approval of a futures-backed trading option as opposed to physical.

Daniel Masters, executive chairman for CoinShares, explained to CoinDesk in early August:

“Until such time major institutions put their name to cryptocurrency custody, I don’t believe a physical ETF can exist in the U.S…I think any futures backed ETF in the United States now has a far better chance of being approved.”

Although, from a strictly operational standpoint, Eric Balchunas, senior ETF analyst for Bloomberg Intelligence, points out that it is widely understood “where the investors have a choice of buying the ETF that hold the futures versus the ones that physically holds it…95% of the people go to the physical one, the only time they hold the one that holds futures are if they have to.”

“I take the one that actually holds the bitcoin will be more successful and you don’t have to deal with rolling futures. There could be some costs associated with that people don’t like,” he added.

These costs mentioned by Balchunas go back to how the fund issuing ETFs will make a sustainable profit. By holding bitcoin ETF futures contracts, the fund will often have to maintain a “rolling position,” buying contracts at high early prices and later selling these contracts closer to expiry at comparatively low prices. Otherwise known as the “cost of caring,” Balchunas notes that in Bloomberg’s “traffic lights system” anything that rolls futures is given a red light to denote high risk.

For Balchunas, on top of other potential concerns by critics who attack cryptocurrencies for having no intrinsic value, futures-backed bitcoin ETFs add “another laying of complication and risk that you don’t need when you already have all these other issues.”

Market impact

Still, one thing is for certain: the market impact of a bitcoin ETF – if and when approved by the SEC – will be a significant one.

Masters, whose firm offers exchange-traded notes for crypto assets including bitcoin and ether, explained how ETFs could effectively enable a new class of participants to invest in the technology.

“Our customers are individuals, family offices, hedge funds that acquire our products through regulated marketplaces and often that might be insurance-based or pension-based. [Our notes] appeal to a very traditional set of investors,” he remarked.

And that’s appealing also to the many crypto enthusiasts in the U.S. who want to see cryptocurrencies move beyond the fringes of the finance industry and into the mainstream.

For his part, Balchunas sees the entry of a bitcoin ETF as a potentially market-boosting one, explaining:

“If a coin-based bitcoin ETF comes out, I would see it getting to probably $5 billion within a year and then ultimately would be a pretty big product probably maybe $10 to $15 billion over the next couple years and that would put it in the top 10 percent biggest ETFs.”

However, Masters isn’t exactly bullish that the U.S. will move quickly on approving cryptocurrency-based ETFs, adding that “the ruleset in America is meaningfully more complex. In the U.S. things tend to be a lot more structured from day one.”

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SEC Faces Thursday Deadline for ProShares Bitcoin ETF Decision

Less than a month after delaying a decision on a bitcoin-based exchange-traded fund (ETF), the U.S. Securities and Exchange Commission (SEC) is poised to approve or disapprove another pair of proposed ETFs. 

Officials at the U.S. securities regulator are set to make a decision on the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF by Thursday, August 23. Unlike this month’s earlier decision to push an approval for the Cboe’s VanEck/SolidX bitcoin ETF, this rule change proposal – filed by ProShares in conjunction with NYSE Arca – cannot be delayed any further under the regulator’s rules.

The ProShares ETF proposals – initially submitted to the SEC last December – are underpinned by bitcoin futures contracts, rather than any physical holdings of bitcoin itself. In other words, the ETF’s value will be determined by the bitcoin futures contracts trading on CME or the Cboe Futures Exchange, according to the original filing.

ProShares originally proposed the futures-based ETFs in September 2017, but noted at the time that the futures market was young and “there can be no assurance that an active trading market for bitcoin futures contracts will develop or be maintained,” according to the filing.

The ProShares Trust previously asked the SEC to withdraw a proposed rule change filed on Dec. 19, 2017 which outlined the ProShares Bitcoin and Short Bitcoin ETFs, as well as the ProShares Bitcoin Futures/Equity Strategy ETF and the ProShares Bitcoin/Blockchain Strategy ETF.

The withdrawal request came after the SEC pushed back against a number of ETF proposals, citing concerns about bitcoin’s volatility at the time. Direxion Shares, VanEck and First Trust Advisors also withdrew a number of similar bitcoin ETF proposals at the time.

However, the SEC later announced it was considering the futures-pinned proposals at the end of January.

To date, the regulator has only denied or delayed bitcoin ETF proposals, with the latest denial coming last month when it rejected a proposal filed by Gemini founders and long-time bitcoin investors Cameron and Tyler Winklevoss.

The proposal had already been rejected in the spring of 2017, but the Bats BZX Exchange, which submitted the proposal, filed an appeal that was later heard by SEC commissioners. 

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Two More Bitcoin Futures ETFs Are Up for SEC Approval

A Maryland-based exchange-traded fund (ETF) firm has filed to launch two new bitcoin futures-based products.

According to a Form S-1 dated September 27, ProShares Capital Management wants to create two bitcoin-tied funds: the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF. Like other proposed ETFs that have emerged in recent months, ProShares isn’t planning to buy direct stakes in the cryptocurrency; rather, it intends to create exposure through derivatives contracts.

Per the filing, ProShares is aiming for a maximum aggregate offering price of $1 million, priced at $25 per share, with a plan to have it listed on the NYSE Arca exchange.

As the filing acknowledges, the market for bitcoin-tied derivatives is still nascent and early-stage.

“Bitcoin futures contracts have only recently been listed for trading and have a very limited trading history. There can be no assurance that an active trading market for bitcoin futures contracts will develop or be maintained,” the firm wrote.

Even still, that market is starting to take shape, if not slowly.

Startups like LedgerX and options exchange operators like CBOE have moved to capitalize on interest in such products. On the other hand, major players like CME are keeping their distance, at least for now, in spite of work on intellectual property related to cryptocurrency derivatives.

Disclosure: CME Group is an investor in Digital Currency Group, CoinDesk’s parent company.

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Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.