The last weekend was punctuated with mentions of the Winklevoss Bitcoin [BTC]-based exchange-traded fund being rejected by the United States Securities and Exchanges Commission [SEC]. Investment management firm VanEck, who also submitted a proposal for a Bitcoin ETF, addressed Dalia Blass, the Director of the SEC Division of Investment Management in a recent letter.
The letter addressed the concerns expressed by the SEC in a Staff Letter and ensured the Director that the offered product will stay in line with the SEC’s vision.
The letter explained at length why VanEck is in a suitable position to begin offering the Bitcoin-based products to the public. They also addressed issues raised by the SEC such as valuation, liquidity, custody, arbitrage, and potential market manipulation and risks associated with the product.
VanEck raised the point that futures contracts for the market have already established a system for the valuation of the underlying Bitcoin spot markets. They also brought it to the SEC’s attention that there are over 100 of these products already being traded on exchanges. Quoting the existence of CBOE [Chicago Boards Options Exchange] and CME [Chicago Mercantile Exchange] futures contracts, the letter stated:
“These existing Bitcoin futures contracts provide real-time reference rates and bid/ask quotes for the price of a Bitcoin futures contract. We believe that the prices provided by CBOE and CME afford fund sponsors adequate information to value the Bitcoin futures contracts held by a fund for the purpose of determining the fund’s net asset Value (“NAV”), as with other futures contracts traded on the exchanges.”
Furthermore, they stated that these contracts have traded close to the spot price of the asset. They also spoke about the valuation of products in case of forks and/or airdrops, using specific indice techniques to include or exclude products based on a number of criteria.
VanEck also spoke about the high amount of liquidity in the Bitcoin spot market. They quoted the existing combined Bitcoin futures volume of close to $150 million to $200 million. They also stated figures of volumes to the tune of 150,000 Bitcoins being traded over exchanges, averaging about 500 trades per minute. OTC markets have close to 50 active participants daily, with 1000 participants in total, they stated. Moreover, they said:
“We have analyzed various redemption scenarios for our proposed ETF taking into account trading patterns on the Bitcoin blockchain as well as the redemption history of various commodity-related ETFs that we believe are appropriate comparisons for the proposed ETF and we reasonably expect that the proposed ETF will have sufficient liquidity to meet redemption.”
VanEck spoke about BitMEX, which has a volume of greater than $2 billion on unregistered futures contracts. This would further increase liquidity, said VanEck.
Under issues of custody, they stated that they are working on custody solutions which “satisfy the requirements applicable to holding Bitcoin directly”, but do not intend for the ETF to do so.
Arbitrage was also addressed in the letter to the SEC, with VanEck stating that the OTC market and “diversified structure of Bitcoin exchanges” allows for a lot of room for arbitrage. They said:
“Based on our examination of the trading of futures contracts and their respective underlying spot markets, as well as other asset classes, exchange-traded products and commodities, we do not believe the volatility of the Bitcoin futures market is significantly greater than assets such as gold miner stocks or certain other equities.”
A majority of the paper was targeted at addressing market manipulation risks, VanEck suggested that the bitcoin futures market is already regulated under the purview of the Commodity Futures Trading Commission [CFTC]. They quoted CBOE’s letter to the SEC, stating:
“‘[a]lthough the CFTC only regulates the bitcoin spot market with respect to fraud and manipulation – in the same way, that it regulates the spot market for gold, silver or other exempt commodities – it has full authority to oversee and enforce the Commodity Exchange Act as it applies to trading in Bitcoin derivatives.’ Similarly, the Commission would maintain jurisdiction for enforcement with respect to the listing, trading, and ongoing operations of the proposed ETF, including with respect to any instance of fraud or manipulation.”
The ETF will also reduce potential manipulation and operational risk associated with Bitcoin, states VanEck. They further added that they are having “active discussions” with a variety of financial advisors and investors to evaluate the proposed ETF.
They ended their letter by stating:
“For the reasons stated above, we believe that our proposed ETF will operate consistent with the rules and requirements of the 1940 Act. Further, by offering investors exposure to Bitcoin through a regulated investment product, we believe the proposed ETF will be consistent with the Commission’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”