Are Bitcoin ETFs on the Way?
CBOE’s intent to list the first bitcoin ETF made its way to Washington’s top securities regulator last week after the exchange called on lawmakers to reconsider their hardened stance toward crypto-backed funds.
CBOE Addresses Concerns Over Crypto Funds
In a Mar. 23 letter to the U.S. Securities and Exchange Commission (SEC), CBOE President Chris Concannon addressed the regulator’s concerns over crypto-market manipulation and fraud.
In the letter, Concannon said the CBOE was uniquely positioned to understand the risks associated with crypto-backed assets, given its success in launching the first bitcoin-based futures contract in December.
“While cryptocurrency-related holdings do raise a number of unique issues, CBOE firmly
believes that such holdings do not require significant revision to the well-established
frameworks for evaluation related to valuation, liquidity, custody, arbitrage, and
manipulation,” Concannon said, adding that “each Cryptocurrency Fund and underlying cryptocurrency-related holdings should be evaluated on a case by case basis in a manner very similar to previous funds and their underlying holdings.”
Despite a rocky start, the CBOE head indicated that bitcoin futures were trading at higher volumes – a trend that is expected to accelerate in the future and possibly bring bitcoin in line with commodity futures.
Concannon’s comments were a direct response to a letter published on the SEC website in January, where the regulator expressed concerns about cryptocurrency to trade associations. In light of those risks, the letter said SEC staff have “significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the 1940 Act and its rules.”
The 1940 Act refers to the Investment Company Act of 1940, which spells out the regulatory responsibilities of investment companies when issuing product offerings.
Multiple Attempts and Failed Starts
The quest for the first bitcoin ETF has eluded several issuers and entrepreneurs over the last 12 months. Would-be investors have been wait-and-see mode ever since Cameron and Tyler Winklevoss had their bitcoin ETF rejected by the SEC last week. Although regulators granted the brothers a second shot to make their case, concerns over manipulation and unregulated markets ultimately prevailed.
About three months ago, several fund managers officially shelved their bids to launch bitcoin ETFs after the SEC expressed long-held concerns over liquidity and valuation. The ETFs in question were brought forward by the likes of Direxion and Exchange Listed Funds, which were developing products designed tot rack bitcoin futures.
Issuers like VanEck and REX ETF also withdrew earlier applications after the SEC ruled on the Winklevoss Bitcoin Trust.
CBOE also submitted proposals to list six bitcoin ETFs last year, according to the SEC’s public filing system. As part of the submission, the exchange proposed specific rule changes that would open the door to bitcoin-related funds.
Much like futures, bitcoin ETFs are seen as a potential game changer for cryptocurrencies because it would enable more traders to access them on the open market. The ETF market is a multi-trillion-dollar industry and one that would likely welcome bitcoin products should the opportunity arise.
There’s no timetable as to when or even if bitcoin futures will hit the market. However, many are convinced that the launching of crypto-backed futures will pave the way for an exchange-traded fund in the not-too-distant future. Many in the industry have speculated that steady interest in bitcoin will lead more issuers to give their listing a go.
The head of ETF research at Morningstar gave a compelling quote back in December during an interview with the Financial Times:
“In a market where the waterfront has largely been covered, this is really the only major project that remains. The futures cover most of the SEC’s concerns by creating a cleared, regulated financial instrument.”
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.