The Securities and Exchange Commission (SEC) is expected to make a decision by March 11 whether to approve Cameron and Tyler Winklevoss’s proposal for an ETF (exchange traded fund) based on bitcoin. The Winklevoss twins, who gained widespread media attention in 2004 for suing Facebook CEO Mark Zuckerberg claiming he stole their original idea (ConnectU) for what would later become the popular social networking site Facebook, are the founders of the cryptocurrency exchange Gemini, which will be used to set the price of their ETF.
The Winklevoss’s ETF was first filed with the SEC in July of 2013, and since then has amended its S-1 (registration statement) filing multiple times to address regulators’ concerns.
Officials from the SEC met with the twins on February 14, 2017, to discuss their ETF proposal, which seeks to be traded as a security on the Bats BZX Exchange Inc. According to a notice released in January 2017, the SEC decision is due by March 11.
What is an ETF?
Generally, an ETF is a marketable security that trades like a stock on an exchange. ETFs typically have a higher daily liquidity and lower fees than mutual fund shares, making them attractive to individual investors. ETF shareholders are entitled to a proportion of the profits (interest or dividends) and may obtain a residual value if the fund is liquidated. The ownership of the fund can be bought, sold or transferred like shares of stock.
At the moment, trading bitcoin requires investors to open bitcoin wallet accounts and purchase bitcoin through online exchanges. With a publicly traded ETF, small investors would be able to call their brokers or simply buy shares online. Putting bitcoin in an ETF structure will make the cryptocurrency more accessible and investable, by allowing parties to participate without having wallets.
The Winklevoss Bitcoin Trust seeks to use the Gemini Exchange to set the price for bitcoin, and is the first of three bitcoin ETF proposals to be filed seeking regulatory approval. Joining the list includes Grayscale’s Bitcoin Investment Trust and the SolidX Bitcoin Trust (XBTC).
“One potential issue with a grantor trust structure [for a bitcoin ETF] is that assets within a grantor trust structure have historically had to be physical assets as well as homogenized. Saying bitcoin is physical is a difficult argument to make, regardless of the demand for bitcoin.”
Approval by the SEC for a bitcoin ETF would streamline bitcoin investing for small traders and institutions, while potentially boosting the value of bitcoin and other digital currencies. According to an interview with Spencer Bogart, head of research at venture-capital investor Blockchain Capital, some $300 million could pour into a bitcoin ETF in its first week.
“I’d be very surprised if it did anything but double from whatever levels it is at beforehand,” Bogart said.
Whoever is first to receive SEC approval, be it the Winklevoss twins, Grayscale, or SolidX, could gain a major financial edge. According to Bloomberg, “SPDR Gold Shares ETF, started in 2004, has more than four times higher the market value of iShares Gold Trust ETF, started in 2005.” Thus, being first in the race for an approved bitcoin ETF could provide incredible wealth to the winner, for years to come.
“This is the first-to-market race,” said Chris Burniske, an analyst at Ark Investment Management LLC.
Grayscale’s Bitcoin Investment Trust (BIT), traded under the ticker Grayscale Bitcoin Trust (GBTC), is an already-existing exchange-traded product, however, it is not an ETF. The trust launched in 2013 as a private fund for accredited investors, and in 2015 received approval from FINRA, the largest independent securities regulator in the US. Grayscale was able to speed up the approval process of the trust through the use of a legal loophole that enabled public fund holders to sell their shares after one year. The SEC issued a cease-and-desist order against the BIT in July 2016 because of a share redemption program conducted in 2014. According to disclosures published by Grayscale in 2015, the program’s repurchases took place at the same time that shares were being created by the trust – in violation of Regulation M.
Pursuant to the JOBS Act, the company created a limited partnership (LP) that owns bitcoin, and after 13 months, listed the LP on the over-the-counter market, which, like the Winklevoss-owned Gemini Exchange, is where all the “pink sheet” or highly volatile assets are listed. Grayscale, a subsidiary of Digital Currency Group, allows for bitcoin trading and charges a 2 percent expense ratio for facilitating investable access to bitcoin.
The GBTC trades like a closed-end-fund usually at a price that is substantially different than the value of the underlying asset, and does not possess the ability to create or redeem shares in the open market. Because of this, bitcoin liquidity can be crimped. Grayscale’s solution is to create an ETF version of their existing model, which will include the creation and redemption mechanism vital to the success of ETFs. According to ETF.com:
“This idea of taking a closed-end product and potentially converting it to an ETF structure could have massive impacts on the ETF industry if the SEC approves.”
The deadline for approval or disapproval from the SEC has not been specified, although sources suggest that a decision could be made on or around August or October of 2017.
SolidX Bitcoin Trust, a proposal by SolidX Management LLC, a subsidiary of blockchain technology company SolidX Partners Inc., is also structured as a grantor trust. An S-1 was first filed with the SEC on July 11, 2016. In a company letter written to the SEC in November 2016, SolidX states:
“The Trust is functionally almost identical to existing physically backed exchange-traded products, which have become an important component of the market. The Sponsor submits that it is in the public interest to permit the development of the Trust, which will enable a new and compelling investment option to investors.”
The SolidX Bitcoin Trust proposal experienced several delays from the SEC pertaining to the decision to list and trade XBTC shares on the NYSE Arca, Inc. (the first all-electronic exchange in the US). The most recent date of approval/disapproval has been set for March 30, 2017.
The XBTC will not be actively managed, and there is no minimum investment - investors may hold as little as a single share or approximately one tenth of a bitcoin. Additionally, SolidX’s proposal appears to include an “in-kind” redemption, a benefit in most ETFs that contribute to liquidity and tight trading spreads.
The biggest difference between XBTC and the Winklevoss ETF is that SolidX has secured insurance coverage for their bitcoin against loss or theft. Another difference is that SolidX will not use the Gemini Exchange as an index for bitcoin price discovery, rather it will use an amalgamation of multiple exchanges to set the price.
What Does ETF Approval Mean?
SEC approval for any of the listed proposals would broaden the accessibility of bitcoin, and as a result, further legitimize the cryptocurrency. Predictions for the Winklevoss ETF proposal can be found on BitMex, which gives the ETF a 45 percent chance for gaining the SEC’s approval.
Furthermore, regulatory approval would solidify blockchain technology’s value to the mainstream, with the possibility of doing the same for other popular digital currencies such as Ether (ETH), currently the second most valuable cryptocurrency.
Many believe that approval of a bitcoin ETF would help support the price of bitcoin in the long term by eliminating some of the stigma surrounding cryptocurrencies, which many still view as risky and volatile investments. According to comments made by Jake Smith, an account manager at bitcoin.com, “Approval would be a great stride toward bitcoin’s mainstream acceptance, perceived soundness and regulatory approval.”