Will we have a BTC ETF approved in October? SEC: Still “work to be done”
Crypto enthusiasts have almost given up on having a Bitcoin Exchange-Traded Fund (ETF) that will allow the masses to easily access the BTC market with custody protections that do not require the tediousness of an offline cold wallet. The SEC, however, keeps dragging its feet and delaying a decision on the applications that pass across its desk, so to speak, but a recent interview with its chairman renewed hope.
SEC Chairman Jay Clayton recently spoke with Bob Pisani on CNBC and shared a few candid comments related to the possibility of a BTC ETF. He admitted that his agency had been pleased with how the crypto market has evolved and addressed the various concerns of the agency. In his own words, he remarked that “progress is being made”, a far cry from absolute denials or outright delaying tactics.
There remain two key concerns, but the foremost one revolves around security. Clayton explained to Pisani that they mean business about “custody”, which may mean one thing in the traditional stock and bond world, but might require a slight overhaul when trying to define and design it to cope with digital assets and private keys: “We’re engaging on this, but there are a couple of things about it that we need to feel comfortable with. The first is custody: custody is a long-standing requirement in our markets, and if you say you have something you really have it.”
Clayton then focused on another central concern with Pisani: “An even harder question given that they trade on largely unregulated exchanges is how can we be sure that those prices aren’t subject to significant manipulation? Now progress is being made, but people needed to answer these hard questions for us to be comfortable that this was the appropriate kind of product.”
Fortunately, Pisani did not bring up a recent story where hackers in Romania tried to “game” Google searches for “BTC” to deceive trading robots that are programmed to react to major changes in this rather obscure data element. There have also been issues with “Whale” accounts, but only transfers have been transacted, no dumping on the market. A “dumping” threat, however, surfaced once it was known that there had been a $3 billion Ponzi scheme at work in Chinese markets. Observers claimed that the crooks were shedding as much as 100 BTC at a time in a scheme comprised of multiple sales.
These price manipulation schemes may be a real threat in unregulated international locales, but operators will establish prices in a BTC ETF by other analytical processes that take into account real volumes, the futures markets where institutional investors dominate the activity, and other computational algorithms known to prevent gaming influences. Bitwise Asset Management, a current ETF applicant has already argued this pricing process with staff at the SEC.
The SEC currently has three BTC ETF applications in its pipeline, but as of the end of 2018, it had already declined acceptance of a dozen or more attempts to form the widely anticipated retail BTC ETF. The reasons cited fell into five categories:
- Global BTC exchanges are generally unregulated (Many do comply with local statutes that govern money transfer practices);
- The potential for price manipulation is pervasive (Bitwise has shown research that, once “fake volume is removed, the real volume is contained within ten exchanges that are primarily located in the U.S.)
- Sophisticated monitoring software to detect potential price manipulation or fraud is non-existent (Nasdaq has shared its cutting-edge monitoring software with U.S. crypto exchanges.)
- Traditional custody arrangements are absent in the Crypto-verse (Fidelity, Coinbase, and the soon-to-launched Bakkt exchange have set a new standard for “custody”, a model for all other exchanges to follow.)
- Breaches and fraud appear to be omnipresent in the global crypto exchange network (U.S. exchanges have already beefed up security to such an extent that professional hacking gangs have gone elsewhere. Analytical firms have also assisted law enforcement in investigations and aided exchanges in freezing illicit account addresses that are known to hold stolen tokens.)
In each area of concern, progress is being made, but Clayton cautions that their concerns are “not trivial” and that there is still “work left to be done”. Crypto enthusiasts may once again be confident when key decision dates at the SEC, October 13th and the 18th, come to pass. These dates will also be important for Bitwise Asset Management and for VanEck Securities, when the SEC is scheduled to make its final decisions on their applications. What ever happens, be sure to prepare accordingly – The markets will react strongly either way.