According to a public notice released by the U.S. Securities and Exchange Commission (SEC), on 9 October 2018, Commissioner Elad L. Roisman and his counsels met with the representatives of VanEck, SolidX, and Cboe to discuss the currently pending application (File No. SR-CboeBZX-2018-040) to list a Bitcoin ETF. 

On 20 September 2018, the SEC’s Division of Trading and Markets, acting on behalf of the Commission (pursuant to delegated authority), announced that it had decided to delay making a decision on the VanEck-SolidX Bitcoin ETF proposal. The new deadline for the SEC’s decision is 29 December 2018, i.e. 180 days after the proposal was first published in the Federal Register on 2 July 2018; the final deadline is 4 March 2019.

Here are the main highlights from the presentation for the “VanEck SolidX Bitcoin Trust” given in front of SEC Commissioner Roisman.

Some Introductory Information About the VanEck SolidX Bitcoin Trust

  • “SolidX began working on a bitcoin ETF in 2015, partnered with VanEck in 2017”
  • “Van Eck is an established issuer that manages over 70 funds with approximately $46 billion in assets under management”
  • “SolidX founders come from traditional financial and legal backgrounds and have been involved in the bitcoin ecosystem since 2011”
  • “Cboe BZX is the listing exchange”
  • “Share price will be – $200,000 (25 bitcoin per share)”
  • “Trust will be insured against loss or theft of bitcoin”

A Brief History of the SEC’s Original Disapproval of the Original Proposal (With the NYSE as the Listing Venue)

  • “SolidX Bitcoin Trust filed its initial S-1 registration statement in March 2016 with the NYSE as the listing venue”
  • “The NYSE filed its 19b-4 in July 2016”
  • “SEC Staff disapproved the 19b-4 filing in March 2017, stating:
    • Filing not consistent with Section 6(b )(5) of the Securities Exchange Act
    • For commodity-trust ETPs approved to date:
      • There have been well-established, significant, regulated markets for futures
      • ETP-listing exchanges had entered into information sharing agreements with the futures markets
    • Information sharing agreements help ensure availability of information necessary to detect and deter potential manipulations and other abuses
    • “The Commission continues to believe that surveillance-sharing agreements between the exchange listing shares of a commodity-trust ETP and significant, regulated markets related to the underlying asset provide a ‘necessary deterrent to manipulation'”

Significant Changes That Have Taken Place Since the March 2017 Disapproval Order

  • “Multiple CFTC regulated derivatives markets now exist for bitcoin
    • CME, Cboe, LedgerX
    • $150-$200 million combined daily trading volume of cleared bitcoin futures on CME and Cboe”
  • “Trust will use OTC bitcoin trading desk pricing
    • CFTC has jurisdiction over these desks, which are principal-to-principal and follow AML, KYC and BSA regulations, among others
    • OTC desk prices are not subject to manipulation in the absence of misconduct by the trading desks themselves”
  • “Proliferation of information sharing agreements
    • CME is an ISG member – Cboe can obtain information
    • ISAs in place with US-based bitcoin spot markets
    • ISAs in process with OTC bitcoin trading desks”
  • “With ~$200,000 share price, VanEck SolidX Bitcoin Trust is not for retail”

Section 6(b)(5) of the Securities Exchange Act

This says:

“The rules of the exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, or to regulate by virtue of any authority conferred by this chapter matters not related to the purposes of this chapter or the administration of the exchange

VanEck, SolidX, and Cboe Believe Trust and Rule Change Request Are Consistent With Section 6(b)(5) 

More specifically, Cboe’s rules and the structure of the Trust (with regards to both insurance and clearing) are consistent with section 6(b)(5) of the Act.

Main Problem With the March 2017 Disapproval Order

The order said:

“The Commission notes that bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop. Should such markets develop, the Commission could consider whether a bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act” 

As issuers, the parties involved are unhappy with the use of the word “significant”. In particular, they are concerned that the SEC staff have created a moving target with their use of this word since the staff have “never provided guidance as to what ‘significant’ means, thereby allowing them to “move the goal post indefinitely.”

Five Reasons Why VanEck SolidX Bitcoin Trust Should Be Approved

All issues that were raised by the SEC in the disapproval order have now been resolved:

  • “There now exists a significant regulated derivatives market for bitcoin”
  • “Relevant markets – Cboe, bitcoin futures, OTC desks – are regulated”
  • “Concerns around price manipulation have been mitigated, consistent with approval of prior commodity-based ETPs”
  • “Cboe’s rules are designed to surveil for potential manipulation of Trust shares”
  • “Promotes investor protection”

The Persistent Double Standard

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Featured Image Courtesy of VanEck and Table Courtesy of the SEC