Bitcoin Futures ETFs: SEC Requests Comment

Bitcoin Futures ETFs: SEC Requests Comment

In December last year the NYSE Arca Inc. filed a proposed rule change that would allow for the creation of Exchange Traded Funds investing in Bitcoin futures contracts, and, potentially, in other related Financial Instruments.

In January 2018 the U.S. Securities and Exchange Commission extended its review of this proposal. Also that month the director of the SEC’s Division of Investment Management outlined her concerns with the idea. These include valuation, liquidity, and transparency.

Most recently, on March 23, the SEC instituted a formal review of the proposal, soliciting comments from the public. Commenters have until April 19 to submit. Those who wish to rebut comments will have until May 3 to do so. The order is available here.

The investment objective of the proposed ProShares Bitcoin ETF will be to seek results that will mirror the performance of lead month bitcoin futures contracts listed and traded on either the CBOE Futures Exchange or the Chicago Mercantile Exchange’s Benchmark Futures Contract.

Comment Letters, and a Novelist

Before issuing the order the SEC had received one comment letter on the subject. This was from Abe Kohen of AK Financial Engineering Consultants LLC (December 27, 2017). It was a brief negative statement. Kohen called the idea of such an ETF a “house of cards” and said that “now mom and dad can lose money going long and short.”

Subsequent to the SEC’s request, three new comments were received on April 6. The most substantive of them is from Anita Desai, who writes that she believes such proposals are premature, since cryptocurrencies “are in their infancies with regard to the widespread understanding of even the fundamentals of what they are, which is a dangerous thing.”

Ms Desai doesn’t identify herself in the comment by any title or institutional affiliation, but there is a well-known Indian novelist of that name who teaches humanities at the Massachusetts Institute of Technology. The SEC’s commenter says, “A lot of people I personally knew lost their entire savings in places like India and Africa, when they drew their entire mutual funds out and plugged cash into ‘Ponzi’ schemes such as ‘Onecoin.’”

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Alexis Renault 2 years ago Member's comment

Nathan Feifel, what's your take on this?

Nathan Feifel 2 years ago Contributor's comment

This conversation over Bitcoin ETFs is really interesting, and the SEC's questions confirm this. Such ETFs could ultimately propel or derail bitcoin in major ways.

From a public interest and legitimization standpoint, ETFs would strengthen Bitcoin. From what I can tell, most people either love or hate bitcoin, with very little middle ground apparent. I believe that most of these individuals not yet financially involved would be compelled to join the market here because of their oft-ardent convictions and newly increased exposure to the asset. While Bitcoin futures have to-date certainly seen some demand, the overall volumes aren't breathtaking. I think Bitcoin ETFs would up that figure a good amount. Bitcoin ETFs would also bring more institutional capital into the crypto world, especially as the onus of actually securing the digital currency in frustrating, unforgiving wallets would be alleviated. I think Bitcoin ETFs would be met with sizable demand, at least initially, and would likely help Bitcoin's liquidity as well drive positive price action too.

However, given the relatively small size of the Bitcoin ecosystem, it is very susceptible to mass manipulation here. We still don't really know what Bitcoin is; there are so many forks, many of which have compelling features. Most importantly and uniquely relevant to the crypto world - there is no guiding authority to tell us which protocol Bitcoin really is, rather the market determines this. As such, allowing an ETF to define what Bitcoin is via its composition could be very dangerous for the asset due to centralization of power. Further, Bitcoin ETFs also indirectly detract from the innovation of Bitcoin. A popular, easily accessible ETF in a relatively small market (current BTC market cap is ~$150 billion) might become more appealing than the actual asset, which would only increase the power that the ETF constructors possess, rather than strengthening Bitcoin itself. From this perspective, such ETFs would be great for common investors and traders looking to profit, but rather unfavorable in the eyes of the crypto community seeking further adoption of Bitcoin and its altcoin associates.

On a different note, what happens if the hype of Bitcoin fades drastically, and/or is displaced by a better digital asset as the crypto market leader in the future? These are not outlandish concerns. That would create a shaky standing for the proposed ETFs. Bitcoin's long term value is certainly not guaranteed, something most commodities don't face.

While less volatile exposure is a good thing for the digital currency, there is still so much ill-defined regarding the protocol, upcoming regulation for the entire space, and adoption prospects. This is a great story to follow, and it will continue shedding light on the developing crypto space at large.

Sensible Cents 2 years ago Member's comment

This could be an article in itself! Nicely done.

Nathan Feifel 2 years ago Contributor's comment

Thanks! What do you think?