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SEC Decision for Cboe Bitcoin ETH has been Postponed
Editorial Team

According to a breaking news publication from blokt.com, the SEC has just postponed its decision on the Cboe Bitcoin ETF of September, 20.

In a notice published on its website on September 20, 2018, the SEC stated:

“Pursuant to Section 19(b)(2)(B) of the Act,30 the Commission is providing notice of the grounds for disapproval under consideration. The Commission is instituting proceedings to allow for additional analysis of the proposed rule change’s consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,” and “to protect investors and the public interest.”

In the same notice, the SEC clarified that it has not yet reached a sound conclusion on the Cboe Bitcoin ETF issue, but it is seeking comments on the proposed rule change:

“Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as described below, the Commission seeks and encourages interested persons to provide comments on the proposed rule change.”

The SEC has asked for comments to “address the sufficiency of the Exchange’s statements in support of the proposal, which are set forth in the Notice“, highlighting the following 18 key areas:

What are commenters’ views of the Exchange’s assertions that bitcoin is arguably less susceptible to manipulation than other commodities that underlie ETPs; that the geographically diverse and continuous nature of bitcoin trading makes it difficult and prohibitively costly to manipulate the price of bitcoin; that trading on inside information regarding bitcoin is unlikely; that the fragmentation across bitcoin markets, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of bitcoin prices through continuous trading activity unlikely; that manipulation of the price on any single venue would require manipulation of the global bitcoin price to be effective; that a substantial OTC bitcoin market provides liquidity and shock-absorbing capacity; that bitcoin’s “24/7/365 nature” provides constant arbitrage opportunities across all trading venues; and that it is unlikely  that anyone  actor could obtain a dominant market share?

What are commenters’ views on the Sponsor’s assertion, described by the Exchange in the Notice, that “the OTC desks have a better measure of the market than any exchange-specific reference price, whether individually or indexed across multiple exchanges”? What are commenters’ views on the Exchange’s representation that, in the OTC markets, the dual elements of principal-to-principal trading combined with the large size at which trades are affected should effectively eliminate the ability of market participants to manipulate the market with small trades as may be the case on any individual exchange? What is the current typical number and volume of transactions on the OTC market? What are commenters’ views on whether the liquidity of the OTC bitcoin market, which would be used as the reference market for pricing the proposed ETP’s holdings, is sufficient for efficient bitcoin price discovery? What are commenters’ views on whether the liquidity of the OTC bitcoin market is sufficient to support efficient arbitrage between the price of the Shares and the spot price of bitcoin? What are the numbers of active traders, market makers, and other liquidity providers on the OTC bitcoin market? To what extent is trading in the OTC bitcoin market subject to regulation?

The Exchange asserts that the dissemination of information on the Trust’s website, along with quotations for and last-sale prices of transactions in the Shares and the IIV and NAV of the Trust, will help to reduce the ability of market participants to manipulate the bitcoin market or the price of the Shares and that the Trust’s arbitrage mechanism will facilitate the correction of price discrepancies in bitcoin and the Shares. In addition, the Exchange asserts that demand from new, larger investors accessing bitcoin through investment in the Shares will broaden the investor base in bitcoin, which could further reduce the possibility of collusion among market participants to manipulate the bitcoin market. The Exchange further states that the exploitation of arbitrage opportunities by Authorized Participants and their clients and customers will tend to cause the public trading price to track NAV per Share closely over time. What are commenters’ views regarding these statements? For example, do commenters agree or disagree with the assertion that Authorized Participants and other market makers will be able to engage in arbitrage and to make efficient and liquid markets in the Shares at prices generally in line with the NAV?

What are commenters’ views, generally, on whether the proposed ETP would be susceptible to manipulation?

What are commenters’ views on whether and to what extent bitcoin futures markets generally, and current volume on those markets specifically, affect the susceptibility of bitcoin to manipulation? What are commenters’ views on whether and to what extent other listed bitcoin derivatives, and the current volume on the markets for those derivatives, affect the susceptibility of bitcoin to manipulation?

What are commenters’ views on the Trust’s proposal to value its bitcoin holdings based on an index—the MVBTCO—that is calculated through a proprietary, non-public methodology that uses the privately reported bid/ask spreads of an unidentified set of U.S.-based market-makers in the OTC marketplace, which, the Exchange says, has no formal structure and no open-outcry meeting place? Is the use of a non-public proprietary index to value holdings based on OTC activity an appropriate means to calculate the NAV of an ETP? What are commenters’ views on whether determining NAV based on the index value at 4:00 p.m. E.T. might, or might not; create an opportunity for manipulation of the NAV or of the Shares?

What are commenters’ views on the statement in the Notice that, according to the Sponsor, the MVBTCO’s methodology decreases the influence on the MVBTCO of any particular OTC platform that diverges from the rest of the data points used by the MVBTCO, which reduces the possibility of an attempt to manipulate the price of bitcoin as reflected by the MVBTCO?

What are commenters’ views on each of the set of alternative means by which the Trust proposes to value its holdings in the event that the Sponsor determines that the MVBTCO, or another alternate pricing mechanism, has failed or is unavailable?

The Exchange represents that, while the Trust intends to conduct the majority of its trading in the OTC market on the OTC platforms that comprise the MVBTCO, the Trust also will maintain an internal proprietary database, which it will not share with anyone, of potential OTC bitcoin trading counterparties, including hedge funds, family offices, private wealth managers, and high-net-worth individuals. The Exchange further states that OTC bitcoin trading is typically private and not regularly reported and that the Trust does not intend to report its OTC trading. What are commenters’ views on how the Trust’s unreported OTC trades may affect the calculation of the Trust’s NAV and the ability of market makers to engage in arbitrage?

What are commenters’ views on the relationship between trading in the OTC bitcoin market and the wider global bitcoin market? What are commenters’ views on the circumstances pursuant to which the OTC bitcoin market may trade at a premium or discount to the global bitcoin market? What are commenters’ views on whether or not the OTC bitcoin market would provide a measure of insulation from erratic or dislocated trading in the global bitcoin market?

What are commenters’ views on the cost and the efficiency of arbitrage across the various global markets for bitcoin? What are commenters’ views generally with respect to the liquidity and transparency of the bitcoin market, the bitcoin markets’ susceptibility to manipulation, and thus the suitability of bitcoin as an underlying asset for an ETP?

What are commenters’ views on the Exchange’s representation that the Sponsor estimates that the U.S. dollar OTC bitcoin trading volume globally represents on average approximately 50% of the trading volume of bitcoin traded globally in U.S. dollars on U.S.-dollar-denominated bitcoin exchanges? Is the volume of U.S. dollar trading of bitcoin—which excludes bitcoin trading against other sovereign currencies or digital assets—a meaningful or appropriate measure of bitcoin market volume? Why or why not?

What are commenters’ views on whether the Exchange has entered into a surveillance-sharing agreement with a regulated market of significant size related to bitcoin? What are commenters’ views on the current regulation of bitcoin-related markets? What are commenters’ views on whether markets for listed bitcoin derivatives—such as bitcoin futures markets— are markets of significant size? What are commenters’ views on whether there is a reasonable likelihood that a person attempting to manipulate the proposed ETP would also have to trade on a regulated bitcoin-related market with which the Exchange has a surveillance sharing agreement? What are commenters’ views on whether trading in the proposed ETP would be the predominant influence on prices in a regulated, bitcoin-related market with which the Exchange has a surveillance-sharing agreement?

The Exchange represents that it has entered into a comprehensive surveillance sharing agreement with the Gemini Exchange. What are commenters’ views on whether the Gemini Exchange is a market of significant size? What are commenters’ views on whether there is a reasonable likelihood that a person attempting to manipulate the proposed ETP would also have to trade on the Gemini Exchange? What are commenters’ views on whether trading in the proposed ETP would be the predominant influence on prices in the Gemini Exchange?

According to the Exchange, the Shares will be purchased primarily by institutional and other substantial investors (such as hedge funds, family offices, private wealth managers, and high-net-worth individuals), which will provide additional liquidity and transparency to the bitcoin market in a regulated vehicle such as the Trust. The Exchange asserts that, with an estimated initial per-share price equivalent to 25 bitcoins, the Shares will be cost-prohibitive for smaller retail investors while allowing larger and generally more sophisticated institutional investors to gain exposure to the price of bitcoin through a regulated product, eliminating the complications and reducing the risk associated with buying and holding bitcoin. What are commenters’ views of the Exchange’s assertions that transacting in the Shares will be geared toward more sophisticated institutional investors and will be cost-prohibitive for smaller retail investors? What are commenters’ views regarding whether broker-dealers are likely to offer fractional shares in the Trust to retail investors, permitting retail investment with a smaller financial commitment? What are commenters’ views of the Exchange’s assertions that the Sponsor believes that demand from new, larger investors accessing bitcoin through investment in the Shares will broaden the investor base in bitcoin, which could further reduce the possibility of collusion among market participants to manipulate the bitcoin market, in light of the possibility that broker-dealers may offer fractional shares to their customers?

The Exchange represents that there will be at least 100 Shares outstanding at the time of commencement of trading on the Exchange and that this amount of Shares outstanding at the commencement of trading will be sufficient to provide adequate market liquidity. What are commenters’ views on the Exchange’s assertion that a minimum of 100 Shares outstanding at the time of commencement of trading will be sufficient to provide adequate market liquidity? What are commenters’ views on whether the 100-share minimum would affect the arbitrage mechanism?

What are commenters’ views on the Exchange’s assertion that, even though the Trust would not comply with the minimum number of shares outstanding required by Exchange rules, the policy concerns underlying that requirement would be otherwise mitigated in the case of the Trust, because the lower number of Shares is merely a function of the price of the Shares and will have no effect on the creation and redemption process or on arbitrage?

The Exchange states that the Trust will maintain crime, excess crime, and excess vault risk insurance coverage underwritten by various insurance carriers that will cover the entirety of the Trust’s bitcoin holdings. The Exchange further states that, while the Trust is confident in its system for securing its bitcoin, insurance coverage of all of the Trust’s bitcoin holdings eliminates exposure to the risk of loss to investors through fraud or theft, which in turn eliminates most of the custodial issues associated with a series of Commodity-Based Trust Shares based on bitcoin. What are commenters’ views of whether the proposed insurance coverage would affect trading in the Shares or in the underlying bitcoins? What are commenters’ views regarding the Trust’s proposed security, control, and insurance measures?

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