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The blood bath of Bitcoin ETFs submissions in the US

Updated: Jun 18, 2019

Bitcoin Exchange Traded Funds are expected to open up the Bitcoin investment market as it would bring this asset class into the classic and well-regulated financial World. Several attempts to register such have been done in the US, yet unsuccessfully until today. Let’s go through what happened and the rationales behind it.

Cash invested in ETFs (in trillion USD)

Source: Investopedia.com


Exchange Traded Funds 101

An Exchange Traded Fund (ETF) is a basket of securities that track an underlying index. Some examples are the SPDR S&P 500 ETF (NYSEMKT:SPY) with $240 billion under management, which tracks the S&P 500 index. Or the Vanguard Total Bond Market (NASDAQ:BND) with $36.6 billion under management, which tracks U.S. investment grade bonds (30% corporate, 70% govies).


There are various types of ETFs. Bond ETFs, industry ETFs, commodity ETFs, currency ETFs, or even inverse ETFs. Unlike mutual funds, they are traded on an exchange. They can include any type of investments: stocks, commodities, bonds, etc.


ETFs offer low expense ratios and fewer broker fees than dealing directly with each underlying security. Their focus on specific industries or asset classes are perceived as an advantage. In addition, they might be a good option from a risk management standpoint through diversification. However, active-managed ETFs have higher fees, diversification is limited to a specific industry, and they often suffer enough liquidity, which negatively affects transactions.


What is a Bitcoin ETF and why does it matter?

As you have probably guessed, a Bitcoin ETF is an ETF tracking the price of Bitcoin. However, none of them already exists in the US despite having a vibrant blockchain and crypto-assets industry. One thing might be unclear: what would make a Bitcoin ETF more attractive than a direct investment in Bitcoin itself?


A bitcoin ETF is kinda the holy grail for Bitcoin as an asset class since it means investing in it would be easier. Thus new types of investors with deep pockets that were previously not able to invest in bitcoin, such as mutual funds and pension funds, for example, could dive in it.


In addition, the approval of a publicly traded Bitcoin ETFs would eventually bring the price of Bitcoin to new highs due to the expected surge in its demand. In fact, that is what happened in the early 2000s when the ETF market opened gold investing to private investors and the price of gold subsequently experienced a tremendous rally that peaked in 2011.


Why is it difficult to register Bitcoin ETFs?

In March 2017, the SEC rejected the application for a Bitcoin ETF put forward by the Winklevoss twins, claiming that the underlying Bitcoin market was still too manipulable, volatile and resistant to surveillance.

"Based on the record before it, the Commission believes that the significant markets for bitcoin are unregulated. Therefore, as the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs agreements that help address concerns about the potential for fraudulent or manipulative acts and practices in this market — the Commission does not find the proposed rule change to be consistent with the Exchange Act."

Two weeks after this decision, the SEC also denied a similar proposal from NYSE Arca. NYSE Arca owns the Intercontinental Exchange and wanted to list the SolidX Bitcoin Trust ETF for similar reasons.


"It does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices.”

Aside from SolidX and Winklevoss, an ETF from Barry Silbert’s Grayscale Investments was registered with the SEC in January 2017. After negative comments from the public, it withdrew it’s application in September. They stated of lack of regulatory development as a reason.


In the Academic World, thoughts were both positive and negative. A seven-letter from Professor Mark T. Williams (Boston University) details a list of reasons why a Bitcoin ETF was not appropriate: https://www.sec.gov/comments/sr-nysearca-2017-06/nysearca201706-1642431-146543.pdf.


However, Associate Professor James J. Angel (Georgetown University) argued that “Moving bitcoin trading activity to regulated US exchanges will improve price discovery and reduce the potential for manipulation and money laundering”: https://www.sec.gov/comments/sr-nysearca-2017-06/nysearca201706-2435172-161045.pdf.


Similarly, Campbell R. Harvey (Duke University) wrote with some colleagues that SEC would have – again - demonstrated its engagement in fulfilling its goals by allowing Bitcoin ETFs.


Despite SEC continuously breaking down attempts to register Bitcoin ETFs positive signals have emerged. So-called “SEC crypto mum” Hester Peirce appointed SEC Commissioner in January 2018 by Donald Trump, said that “The SEC needs to make real strides to move past our legacy of being unwilling to tolerate innovation”.


A further wave of hope was delivered in February this year, when a supposedly leaked interview with SEC Commissioner Robert J. Jackson Jr. surfaced on Twitter. In it, Jackson allegedly stated that he expects his agency to license a bitcoin ETF sooner or late.


Check the full version of Blockchain Quarterly (Q1 2019) report for more Insights.