Nearly four months after Bitcoin futures hit Wall Street, trading giant Cboe Global is still working to allay U.S. Securities and Exchange Commission (SEC) concerns over Bitcoin Exchange Traded Funds (ETFs).
Cboe Global and CME Group were approved by the SEC to offer Bitcoin-based futures last year, and Wall Street cryptocurrency trading began in December 2017.
The natural next step for cryptocurrencies to integrate into global traditional markets is ETF trading. Cboe is one of a number of companies with bitcoin-linked ETFs waiting for approval from the SEC.
Significant investor protection issues need to be examined
The SEC is proving reluctant to grant ETF approvals. In a staff letter dated January 18th, 2018, it said:
We believe that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors.
Though it recognized a “range of potential benefits” expressed by cryptocurrency proponents, the SEC outlined its concerns:
We are also aware that critics of cryptocurrencies have raised various concerns regarding transparency of information, trading, valuation and other matters related to the nature of the underlying assets. In addition, the innovative nature of cryptocurrencies and related products, as well as their expected use and utility in our financial markets, means that they are, in many ways, unlike the types of investments that registered funds currently hold in substantial amounts.
ETFs not yet appropriate
The SEC letter raised a number of questions, including problems of liquidity and in determining a daily net asset value (NAV) for trading. It concluded:
Until the questions identified above can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products.
Cboe: Evaluation should be on a case-by-case basis
Chris Concannon, Cboe Global Markets president, responded to the SEC’s note with a direct letter to Dalia Blass, the SEC’s Director of Investment Management and author of the SEC’s letter, aiming to address some of the concerns raised. Concannon writes:
While cryptocurrency-related holdings do raise a number of unique issues, Cboe firmly believes that such holdings do not require significant revision to the well-established frameworks for evaluation related to valuation, liquidity, custody, arbitrage, and manipulation. Rather, each Cryptocurrency Fund and underlying cryptocurrency-related holdings should be evaluated on a case by case basis in a manner very similar to previous funds and their underlying holdings.
Liquidity, Fragmented Markets, and Value
Concannon answered questions of liquidity with comments on the volume of trading seen by cryptocurrency exchanges. As trading of Bitcoin futures has not accelerated quite as the market expected, Concannon said:
Cboe expects these volumes to continue to grow and in the near future reach levels comparable to those of other commodity futures products at the time that they were included in ETPs.
In answer to issues of market fragmentation, Concannon compared other assets and, in an interview with Business Insider, went further:
If you look at the currency or the gold market, it is probably more fragmented than crypto,
He also expressed that the Cboe letter was not to rush the SEC but, instead, to point out areas that could be satisfied and to advocate for the development of the marketplace.
A number of companies have already withdrawn their applications for Bitcoin ETFs due to stalling regulators, including VanEck and ProShares.
For Bitcoin ETFs and further progression of cryptocurrency products onto Wall Street, it seems there is no light at the end of the tunnel, just yet.
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