Is ETF necessary to Bitcoin and cryptocurrency environment?

31.Jul.2018Editorial

What the recent rejection by SEC means to Bitcoin and whether it could influence its growth

Bitcoin news has been recently shaken by the rejection of Winklevoss ETF, a decision that caused controversy and contrasts even inside the federal controlling body. It is time to examine in deep why this proposal has been repelled, and which are its consequences.

Let’s start explaining what an ETF is. ETF stands for “Exchange-Traded Fund”, and it is a marketable security which follows the value of an asset, an index or a basket of assets, according to the specific formula used. The meaning of an ETF comes from the higher liquidity of its market and the lower transactional costs compared to the assets it stands for, whereby the ETF trading can be more convenient and can have an economic logic. The issuer of the ETF is an investment vehicle whose structure varies according to the country and of issuer operative choices, and which owns the underlying assets of the ETF, which should be 100% backed. So when we speak about ETF we have different players, who are:

  • the ETF vehicle;
  • the Exchange where the ETF is traded;
  • the investors in the ETF.

In the case of Bitcoin ETF the exchange was Batz BZX Exchange Ltd, while the ETF was under the form of shares issued by Winklevoss Bitcoin Trust, each representing a Bitcoin. Batz asked for a rule change to SEC, Security Exchange Commission, in June 2016, for being so allowed to trade an ETF based on Bitcoin. The BZX petition was repelled in March 2017, but BZX presented a petition against this rejection. Also this last move was, however, useless as this petition was definitely dismissed this month, on 26.

Why does SEC have such a negative vision of Bitcoin ETF? The answer is simple: the Federal Bureau does not see any reason for having it. SEC took in account the following factors in judging the ETF legitimacy:

  • resistance to manipulation, or at least better resistance than the one of the backing assets;
  • the capability of detecting fraud, compared to the main, traditional, markets;
  • the capability of avoiding fraudulent behavior through surveillance sharing agreement with other derivative markets;
  • the capability of achieving a better surveillance through the sharing of information with Bitcoin exchanges;
  • a better protection of investors and of public interest;
  • the liquidity of the ETF market.

SEC deeply analyzed these points, also accepting external opinions, but at the end refused the proposal, not considering a Bitcoin ETF market more efficient and not more fraud-resistant if compared to actual Bitcoin exchange. Winklevoss Bros failed to grant these essential points, and to the cryptocurrency trader, this appears obvious: which is the advantage of trading an ETF based on Bitcoin, compared to trading Bitcoin? Maybe it could have been better introduced in some financial company balance sheet, but there would not be any specific advantages in trading it.

The SEC negative decision doesn’t involve the cryptocurrency environment and was not without consequences. In its statement SEC affirms that: “The Commission emphasizes that its disapproval does not rest on an evaluation of whether Bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment”, leaving the door open to a future clearance of different financial products based on cryptocurrencies. Meanwhile Commissioner Hester M. Peirce dissented with the Commission order, in a public diffused document published on the SEC official website. These are clear signs that this decision is specific to BZX Winklevoss proposal, and could be overcome by a better planed financial vehicle. The door is neither open or closed, it simply needs the appropriate key.