The SEC issued an Order on September 20, 2018 instituting proceedings to disapprove or approve the listing and trading of shares of a Bitcoin ETF sponsored by SolidX Management. The goal of the proposed ETF is to reflect the performance of the price of bitcoin, less the expenses of the Trust’s operations, which obviously will not be actively managed. Each Share will represent a fractional undivided beneficial interest in the Trust’s net assets.
In prior months, the SEC repeatedly rejected applications for Bitcoin ETFs, rejecting nine proposals. Specifically, the Division of Trading and Markets took the action in a decision on August 22, 2018. However, the Office of the secretary swiftly stepped in and issued a letter stating it would review the decision.
This most recent Order discusses information included in the SolidX application and traditionally found in ETF applications that are approved: financial calculation methods, security practices, insurance underwriting, and website disclosures. The application also dedicates several pages to the discussion of how the ETF will help curb market manipulation:
[T]he Sponsor expects 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 between bitcoin and the Shares. The Exchange states 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, and that the Sponsor expects that 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 application goes on to discuss various characteristics inherent in bitcoin that obstruct market manipulation:
bitcoin is arguably less susceptible to manipulation than other commodities that underlie exchange-traded products (“ETPs”) because there may be inside information relating to the supply of the physical commodity (such as the discovery of new sources of supply or significant disruptions at mining facilities that supply the commodity)
The application also argues that “the fragmentation across bitcoin platforms, 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.”
At the end of the Order, the SEC requests comments on various assertions made in SolidX’s application. Out of 18 requests, more than half cite to the issue of market manipulation and request comments on the same. Accordingly, if the comments are any indication of the primary hurdle to the approval of a Bitcoin ETF, the SolidX application is likely to be approved if the SEC agrees with SolidX’s arguments and explanations regarding the inability of wrongdoers to manipulate the bitcoin market and receives favorable comments supporting such arguments.