The introduction of a cryptocurrency ETF could catalyze an influx of institutional capital and open a new channel for investment in the sector. On June 26, 2018, the SEC received an application from CBOE Futures Exchange to launch the world’s first Bitcoin ETF.
Another Attempt at the Crypto Holy Grail
One of the first to launch Bitcoin futures, Cboe Global Markets has partnered with Van Eyck Investment and SolidX to introduce a Bitcoin ETF to global markets.
On June 26, the SEC received an application by CBOE to offer clients the buying and selling of SolidX shares, which are currently valued at approximately 25 bitcoin. If approved, accredited investors will be able to trade a Bitcoin ETF in the form of baskets of 5 SolidX shares (~100 bitcoin) on the CBOE exchange:
“The Trust will issue and redeem “Baskets”, each equal to a block of 5 Shares, only to “Authorized Participants.” The size of a Basket is subject to change.”
According to the SEC application, the Bitcoin ETF will be physically backed by secure holdings of bitcoin in the VanEck SolidX Bitcoin Trust. To maintain liquidity and sufficient reserves, the Trust will trade bitcoin on over-the-counter (OTC) exchanges both domestically and internationally.
“the investment objective of the Trust is for the Shares to reflect the performance of the price of bitcoin, less the expenses of the Trust’s operations. The Trust intends to achieve this objective by investing substantially all of its assets in bitcoin traded primarily in the over-the-counter (“OTC”) markets, though the Trust may also invest in bitcoin traded on domestic and international bitcoin exchanges, depending on liquidity and otherwise at the Trust’s discretion.”
In an effort to alleviate investor risk and increase overall security, the Trust application outlines an insurance system backed by its sponsor, SolidX.
“The insurance will cover loss of bitcoin by, among other things, theft, destruction, bitcoin in transit, computer fraud and other loss of the private keys that are necessary to access the bitcoin held by the Trust… The insurance policy will carry initial limits of $25 million in primary coverage and $100 million in excess coverage, with the ability to increase coverage depending on the value of the bitcoin held by the Trust.”
In the event of private key theft or loss, the Trust further ensured clients that their investments will be kept safe via a cold storage wallet backup:
“For backup and disaster recovery purposes, the Trust will maintain cold storage wallet backups in locations geographically distributed throughout the United States, including in the Northeast and Midwest.”
Is the SEC Finally Taking Crypto’s Side?
On June 26, the SEC revealed a proposal to ease the approval process and “modernize the regulatory framework for exchange-traded funds.” Most notably, the proposal stated that the “cost and delay of obtaining an exemptive order” during application would be eliminated, lowering the market barrier to entry for innovative new ETFs backed by cryptocurrencies.
Previous applications to launch Bitcoin ETFs by CBOE, Gemini, and SolidX were rejected by the SEC due to global regulatory uncertainty and instability in cryptocurrency markets at the time.
However, the impending classifications of Bitcoin and Ethereum as non-securities is indicative of a maturing cryptocurrency sector making its way into legitimization.
With the launch of a Bitcoin ETF, the long-awaited catalyst of incoming institutional investment could finally take place and drive growth in the sector.
Whether this application will align with the SEC’s proposal to alleviate ETF processes and make its way to global markets has yet to be revealed. If approved, Bitcoin ETFs could be available for trading in the first quarter of 2019.
Cover Photo by Dustin Groh on Unsplash