Recently, crypto journalist and podcast producer Laura Shin had a chance to sit down with Jan van Eck, the President and CEO of investment management firm VanEck Securites Corporation, and talk about the VanEck-Solid X Bitcoin ETF ("VanEck SolidX Bitcoin Trust") proposal and the concerns of the U.S. Securities and Exchange Commission (SEC), especially regarding market manipulation.
This conversation was the closing fireside chat at the one-day "Consensus: Invest 2018" conference held in New York City on 28 November 2018, and it was released earlier today as episode 051 of her "Unconfirmed" podcast.
As CryptoGlobe reported, during that conference, SEC Chairman Jay Clayton was interviewed by Glenn Hutchins (a Class B Director to New York Fed Board of Directors), and Jay made it clear through his comments that no Bitcoin ETF would get approved until the Commission was satisfied that there was no market manipulation and that there was an adequate custody solution:
"What investors expect is that the trading in that commodity that is underlying the ETF is trading that makes sense, is free from the risk or significant risk of manipulation. Another thing they really care about, [that] we really care about, is that the assets underlying that ETF... that you have good custody of it, that it's not going to disappear, that the risk in the ETF is truly the risk in the value of the underlying asset, it's not the risk of theft or disappearance. Those two issues are important to me to get comfort on before we would allow an ETF with a digital currency underlying it to go forward."
"Well, it is one of the core issues in custody that we've had to deal with, I think, for getting an ETF approved. It's sort of how do you define what market manipulation is and what mechanism do we have to put in place to get a higher comfort level, and I'm not sure that's been defined by the SEC. So, the process we are doing to create indices that the CFTC is, for example, comfortable with is sourcing prices from exchanges that have surveillance mechanisms in place. So, let's say we can source prices from exchanges that represent 1% of the market turnover of Bitcoin. Is that enough or do we have to surveil 5% of the market or is it 45%? Because we'll never get all the offshore exchanges to submit to a U.S. surveillance regime. So, it sounds good, and obviously no-one wants to participate in manipulated markets, but it's not a bright-line test they are offering to us. It's sort of like 'fix this problem', but it's not clearly identified."
Different Factors That Went Into Creating Robust Indices
"Well, we have a big ETF business, and so what we've built is an index company [MV Index Solutions] to support that business, to create indices that are investable. In other words, we have ETFs that trade hundreds of millions of dollars a day, and you need to have an index that an ETF manager can track. For example, you don't want to have an index that's full of a lot of small-cap stocks because you can't buy them in size and then you can't replicate the performance of that index. So, there's a lot of small cryptoassets that are not that liquid and the ETF performance would differ quite a bit if one just composed an ETF of those. So, the real impetus was to create an index company that created investable indices. So, translating that into the crypto world is pretty straightforward. We put some quality constraints, liquidity constraints, around that, and we felt that was necessary for the community."
Attitude of Traditional Institutional Investors Towards Crypto
"The traditional investment world is not waiting for the on switch [e.g. products from Bakkt and Fidelity being launched]. Partly, it's just the volatility of the assets. I mean, we are all in this room comfortable with very volatile risky assets because we get high risk and high reward. Those aren't assets that normally fit into people's college funds or retirement funds, and the wealth management world doesn't know how to deal with, and those conversations are at very early stages. So, it's great that more products are coming to market, but I think adoption will be slow unless you have a bull market."
What Can VanEck to Address the SEC's Concerns?
"Well, I think we're doing our best. The two concerns of custody and pricing, I think we've made a lot of progress, along with several partners along the pricing front. I want to applaud some of the OTC market makers that were willing to say 'listen, we want this whole ecosystem to grow', and they were willing to give some of their price information, which SolidX had request as part of our joint filing in front of the SEC. So, getting that previously dark part of the ecosystem a little bit into the light was super helpful. And so I think that's getting the regulators more comfortable. It's just [that] they haven't clearly defined when we get to the finish line is, and so you are just afraid that the finish line moves away from you the closer you get to it, but that's reality, and I think the pricing problem is fundamentally solved. There's a lot of price input from a lot of different sources. We can price a Bitcoin ETF... We can get access to enough trading platforms that have surveillance on them which meets that market manipulation test to get regulators comfortable."
Featured Image Courtesy of VanEck Securities Corporation