VanEck has written a letter to the Securities and Exchange Commission (SEC) potentially refuting many of its concerns about bitcoin ETFs and cryptocurrency ventures. As it stands, the company stands a good chance of being the first to offer a bitcoin ETF approved by the SEC.
The SEC Doesn’t Know What to Think
The governing body’s reaction to bitcoin ETFs has been somewhat mixed. The VanEck SolidX bitcoin trust first applied for bitcoin ETF approval back in early 2017, though the notion was rejected by SEC legislators. This year, however, the company submitted the same application and experienced different results.
The SEC initially approached industry experts about the ETF to garner insight about what it could bring to the financial space. From there, the organization posted the application for public comment from everyday traders to see if this was something they’d be interested in. The application received positive feedback, and the SEC decided it was time to become less stringent with its laws regarding open-ended ETFs.
This felt like a big win for bitcoin enthusiasts until the SEC decided to postpone all decisions regarding five additional bitcoin ETFs. The association then rejected an application from the Winklevoss Twins of the Gemini Exchange in New York. After appearing open-minded on bitcoin ETFs, it seemed the SEC was right back where it started.
What Does the Letter Say?
The letter from VanEck is composed by the company’s CEO and president Jan van Eck. It is split into five separate sections: valuation, liquidity, custody, arbitrage and potential manipulation and other risks, and tries to address the SEC’s worries in all these areas.
Regarding valuation, the SEC has laid out several concerns regarding forks and airdrops, which it believes will make the valuation of cryptocurrency nearly impossible to establish. The letter addresses this worry by explaining:
“While the valuation of cryptocurrencies and digital assets in the underlying spot markets may present some unique issues as raised in the staff letter, such as the valuation of forks and airdrops, we do not believe that the valuation of futures contracts in accordance with the requirements of the Investment Company Act of 1940 presents any novel issues for a futures-based bitcoin ETF.”
The letter continues to say:
“These existing bitcoin futures contracts provide real-time reference rates and bid/ask quotes for the price of a bitcoin futures contract. We believe that the prices provided by CBOE and CME afford fund sponsors adequate information to value the bitcoin futures contracts held by a fund for determining the fund’s net asset value (NAV).”
Additional Problems are Talked About
Regarding the SEC’s worries over liquidity and custody, the letter states that while the physical bitcoin market is highly liquid, the bitcoin futures market has been efficient against this market, and that the total combined bitcoin futures volume for both CBOE and CME is as high as $200 billion. It further explains that bitcoin futures have traded in a “fair and orderly” fashion since they were first created.
Additionally, VanEck has said it will not invest in physically-settled bitcoin futures contracts, nor will the company rely on third-parties to hold its assets.
In the arbitrage section, the letter acknowledges that the SEC is worried about the over-the-counter (OTC) bitcoin market, in which prices can differ depending on the exchange listing the asset(s) in question. Jan van Eck tries to lessen these worries, claiming:
“To date, there have been seven percent and 13 percent halts for the CME contracts, and ten percent halts for the CBOE contracts. Each halt lasted for two minutes. Markets then re-opened trading in an orderly fashion. During a halt, ETF market makers will continue to have access to underlying real-time futures reference prices, as well as prices in the underlying physical markets.”
Some of These Issues Don’t Apply
Regarding “manipulation and other risks,” VanEck claims that the SEC’s concerns in this department are overstated, and that many do not apply unless the SEC decides to become an actual market regulator:
“While one cannot rule out manipulation in the underlying spot market, we believe that due to the diversified ownership and volume of trading, the market does not have major structural vulnerabilities. Increased enforcement and regulatory actions can reduce the number of bad actors in a basically sound market. A regulated fund is a natural extension of this.”