The U.S. SEC's final deadline to approve or deny the two ProShares Bitcoin ETFs (proposal filed in December 2017) is on 23 August 2018. In view of the SEC's second rejection of the Winklevoss Bitcoin ETF, do these two ProShares ETFs have any chance of getting approved?
ProShares (a division of ProFunds Group) is one of the largest provider of ETFs, with over $30 billion in assets. It is particularly a leader in the area of leveraged and inverse ETFs.
On 4 December 2017, NYSE Arca (the top U.S. exchange for the listing and trading of exchange-traded funds) first filed a proposal with the SEC to list and trade two ProShares Bitcoin ETFs: "ProShares Bitcoin ETF" and "ProShares Short Bitcoin ETF". The notice of the filing was published on the Federal Register on 26 December 2017.
The Registration Statement was filed with the SEC on 19 December 2017.
According to the Registration Statement:
- the investment objective of ProShares Bitcoin ETF is "to seek, results (before fees and expenses) that, both for a single day and over time, correspond to the performance of lead month  bitcoin futures contracts listed and traded on either the Cboe Futures Exchange (“CFE”) or the Chicago Mercantile Exchange (“CME”) (the “Benchmark Futures Contract”)."
- the investment objective of ProShares Short Bitcoin ETF is "to seek results, for a single day, that correspond (before fees and expenses) to the inverse (−1x) of the daily performance of the Benchmark Futures Contract."
According to the notice in the Federal Register:
"Each Fund will seek to achieve its respective investment objective by investing, under normal market conditions, substantially all of its assets in Benchmark Futures Contracts (or short positions in Benchmark Futures Contracts, as applicable)."
As American attorney Jake Chervinsky explains in the following tweet, these two Bitcoin ETFs are quite important:
2/ These ETFs are important: they're the first ones that the SEC will approve or deny in 2018 & will set the stage for others in coming months.— Jake Chervinsky (@jchervinsky) August 17, 2018
Of course, nobody knows what the SEC will decide, but we can use their recent statements to figure out what factors they'll consider.
On 18 January 2017, the SEC published a staff letter (written by Dalia Blass, director at SEC's Division of Investment Management). This letter stated that there were "significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors." The letter further stated that the EC was concerned about five issues and gave several examples of questions they had with regard to each of these:
- Valuation: e.g. "Would funds have the information necessary to adequately value cryptocurrencies or cryptocurrency-related products, given their volatility, the fragmentation and general lack of regulation of underlying cryptocurrency markets, and the nascent state and current trading volume in the cryptocurrency futures markets?"
- Liquidity: e.g. "What steps would funds investing in cryptocurrencies or cryptocurrency-related products take to assure that they would have sufficiently liquid assets to meet redemptions daily?"
- Custody: "To the extent a fund plans to hold cryptocurrency-related derivatives that are physically settled, under what circumstances could the fund have to hold cryptocurrency directly?"
- Arbitrage (for ETFs): e.g. "Have funds engaged with market makers and authorized participants to understand the feasibility of the arbitrage for ETFs investing substantially in cryptocurrency and cryptocurrency-related products?"
- Potential Manipulation and Other Risks: e.g. "Are there particular challenges investment advisers would face in meeting their fiduciary obligations when investing in cryptocurrency-related funds on behalf of retail investors?"
Last month, the Winklevoss Bitcoin ETF (a product based on "physical" bitcoins), which was originally denied by the SEC's Division of Trading & Markets (which deals with initial ETF applications) in March 2017, was denied appeal by the SEC Commissioners, and a decision postponed to 30 September 2018. Jake Chervinsky nicely summarizes the concerns expressed by the Commissioners in this tweet:
7/ A majority of Commissioners found that bitcoin markets:— Jake Chervinsky (@jchervinsky) August 17, 2018
- are not inherently resistant to manipulation
- can't adequately deter manipulation without being regulated
- aren't liquid enough to protect market integrity
- don't allow efficient arbitrage between ETF shares & spot
One key advantage of the ProShares Bitcoin ETFs over the Winklevoss Bitcoin ETF is that it uses the well-respected SEC-regulated CME and Cboe futures exchanges rather than the unregulated and relatively new Gemini digit asset exchange.
However, in view of the fact that Bitcoin (and other cryptocurrencies) are experiencing a bear market and concerns expressed by the Commissioners just last month (especially regarding price manipulation in Bitcoin markets), it seems unlikely that the ProShares Bitcoin ETFs will get approved. Even if they do somehow get approved, since neither of these to ETFs would buy/sell/hold any bitcoin, the effects of such approval on the Bitcoin price would probably be fairly limited. Chervinsky seems to agree with this assessment:
12/ As I mentioned above, the ProShares ETFs are entirely derivative-backed. That means they wouldn't buy, sell, or hold any actual bitcoin.— Jake Chervinsky (@jchervinsky) August 17, 2018
The bull theory is that an ETF would make bitcoin available for institutional investors, but does it help if they only buy derivatives?
And this is why so many crypto traders/investors are so obsessed with what happens with the VanEck-SolidX Bitcoin ETF (which is a "physically-backed" product). Although approval of the ProShares Bitcoin ETFs does not dramatically increase the chance of eventual success for the VanEck-SolidX Bitcoin ETF, it could indicate a softening of the negative stance shown so far by the SEC, and is likely to be seen as "good news" by the crypto markets.
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