When the first “real” possibility of a Bitcoin ETF (exchange traded fund) first appeared on the scene, investors within and without the cryptosphere were abuzz with excitement.
It came in late July of 2018–Cameron and Tyler Winklevoss, twin-brother Bitcoin billionaires and founders of the Gemini exchange, had submitted an application for a Bitcoin ETF. While theirs wasn’t the first application, many analysts believed that it might be the first application to stand a fighting chance at getting approved.
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For many of the same analysts, approval of a Bitcoin ETF also meant a major recovery in the price of Bitcoin. After all, institutional investors would leap at the opportunity to finally invest in cryptocurrency in a slightly more secure and regulated manner–right?
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The world never got a chance to find out. After a bull-run leading up to the SEC’s decision to deny the Winklevoss’ application, the price of BTC came crashing down.
A number of firms have submitted applications for Bitcoin ETFs, but none has come any closer to success.
The SEC has denied the Winklevoss CBOE bitcoin ETF application. Concerns on surveillance remain https://t.co/0p3uyrQ0XO pic.twitter.com/CRwDOZYKZo
— Anna Irrera (@annairrera) July 26, 2018
Therefore, Cboe understands that in order for an ETF to get approved, it must play the SEC’s game–or at least make it seem as if it is. The language in the filing reflects this: “as of now, no CCPs support the clearing of bitcoin Investors are left facing absolute counterparty risk. Such risks are often unacceptable to many investors.”
Will New Surveillance Tools Need to Be Developed and Implemented Before an Approval is Likely?
“An ETF provides a straightforward solution for investors seeking price exposure without facing counterparty risk, as the ETF would be cleared through DTCC. Furthermore, in creations and redemptions, the Trust always requires APs and trading counterparties to settle their leg of the trade before the Trust will do so.”
But is this enough? Meir doesn’t seem to think so. He believes that a new class of AI-based surveillance tools is necessary before the SEC will seriously consider approving an ETF. “Blockchain and its smart contracts, oracles, and distributed consensus mechanisms offer enormous value, but also add numerous new layers of complexity,” he wrote, “and more complexity means more opportunities for manipulation.”
Indeed, traditional KYC and AML surveillance methods just won’t cut it in the cryptosphere. “Rule-based surveillance systems are [only] good at responding to known threats,” he explained.
“In traditional markets that existed for over a century, this makes sense, as most threats are known. In the constantly evolving blockchain-based trading realm, however, there are plenty of unknown unknowns – what manipulation will look like in two, five, and ten years can be completely different from what we know in traditional trading and even from today’s digital asset trading.”
If this is indeed the case, a Bitcoin ETF probably isn’t in the cards for this year. But then again, it could be.
The new filing for the VanEck/SolidX Bitcoin ETF can be viewed below, courtesy of CoinDesk.
SR-CboeBZX-2019-004 by on Scribd