In a letter of response to the SEC’s Staff Letter, New York-based VanEck rejects five of the regulation body’s chief concerns with their proposed futures-based Bitcoin ETF: valuation, liquidity, custody, arbitrage, and potential manipulation.
Forks, airdrops, and other occurrences can alter the value of a cryptocurrency, and to the SEC, this poses a significant threat to their credibility as a basket-traded asset. To VanEck, however, challenges in valuation are not unique to cryptocurrency — and are commonly alleviated in other asset classes by the use of futures contracts. The letter explains:
The use of futures contracts to gain exposure to an asset is not unusual, and the valuation of futures contracts is a well-established practice. In fact, there are over 100 exchange traded products listed on U.S. exchanges that are based on futures contracts.
According to the investment company, net asset value (NAV) of their futures-traded Bitcoin contracts would be maintained adequately by real-time prices provided by CBOE and CME.
For ETFs, lower levels of liquidity can equate to large differences between NAV and the value of the underlying assets, and significant bid-ask spreads — both of which can trigger a crisis when buyers are not matched to sellers.
When it comes to the asset Bitcoin, however, VanEck believes liquidity should not be cause for concern. The letter highlights the fact that the physical BTC market is highly liquid — and one that trades on average with less than a five-point spread. Going forward, the investment firm asserts that the two existing BTC futures contracts — CME and CBOE — have traded in a “fair and orderly fashion since their inception”.
As the Investment Company Act of 1940 suggests an ETF must hold its underlying assets with a third-party, VanEck maintains that its ETF will not invest in physically-settled BTC futures contracts — thereby maintaining all custodial legality.
Where the SEC may have suggested Bitcoin’s volatility could compromise the arbitrage process, VanEck states that the “robust” OTC market and large number of exchanges creates significant arbitrage opportunities. According to the company, the availability of BTC through this wide range of avenues protects the arbitrage process against trading halts and nullifies challenges related to volatility.
Potential Manipulation and Other Risks
Perhaps playing to the ego of the commission, VanEck states that the SEC’s vigilant regulation will stomp out any foul play in their ETF — existing in a market that is “basically sound” already, with no major vulnerabilities.
Tabled in the context of the recently-rejected Winklevoss Twins’ Bitcoin ETF, VanEck’s letter will surely add to mounting pressure for the SEC. As the commission juggles a number of pending ETF proposals — and battles external and internal dissent over its stance — the VanEck/Cboe-backed ETF may be the regulatory body’s most persistent issue yet.
In defiance of the Winklevoss ETF rejection, SEC Commissioner Hester Peirce recently stated her dissent on Twitter:
Apparently, bitcoin is not ripe enough, respectable enough, or regulated enough to be worthy of our markets. I dissent: https://t.co/gH5zXaKtmj
— Hester Peirce (@HesterPeirce) July 26, 2018