The Securities and Exchange Commission (SEC) is considering a rule change that may allow bitcoin ETFs to be listed on exchanges. According to a document posted on the SEC website, the agency has begun the process to approve or disapprove a change in its rules that allows two bitcoin ETFs to be listed on the NYSE Arca exchange.
The two ETFs are Proshares Bitcoin ETFs and Proshares Short Bitcoin ETFs. Both proposed ETFs track bitcoin futures contracts on the Cboe and the CME. The latter ETF provides returns equal to the inverse of daily performance of bitcoin futures. (See also: Bitcoin ETFs Are Next In Line After Futures.)
The introduction of bitcoin ETFs could add further liquidity to bitcoin markets by providing another venue for investors, institutional and individual, to bet on the cryptocurrency. Currently bitcoin-based ETFs trade on OTC markets and have reaped spectacular returns in the last year. However, those numbers are marred by the volatility of underlying (and unregulated) exchanges that they track. A regulated bitcoin ETF could help tamp down the premiums and wild swings in prices by instituting controls and rules on their movement and requiring self-certification.
Bitcoin ETFs: A Long Road
The possibility of bitcoin-based ETFs was first suggested by the Winklevoss twins, who filed an application with regulatory agencies back in 2013. Their application was rejected. Since then, applications filed by other firms have met with a similar response. The SEC published a letter this January detailing its concerns. Those concerns span a broad range of issues from custody problems due to bitcoin’s digital provenance to arbitrage issues stemming from the absence of liquidity in bitcoin markets. (See also: Why Is the SEC Afraid of Bitcoin ETFs?)
The federal agency is not the only one worried about these issues. In a note earlier this year, Goldman Sachs said bitcoin was much better suited as a crypto commodity rather than a cryptocurrency. “With no large institutions operating across exchanges, there is likely an insufficient scale of arbitrage,” the firm wrote in its note.
But the introduction of bitcoin futures at Cboe and CME last year has provided momentum to the movement again. Proposals in the new crop of ETFs aim to track bitcoin futures (which are regulated by the CFTC) instead of prices at cryptocurrency exchanges. The Winklevoss twins’ recent proposal to create a self-regulatory organization for cryptocurrency exchanges may also further allay the SEC’s concerns regarding unregulated exchanges.
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