For many in the cryptocurrency community, Aug. 10 can't come quickly enough. That is the date that the U.S. Securities and Exchange Commission (SEC) has offered as the earliest possible date for a decision regarding the latest major proposal for a bitcoin exchange-traded fund (ETF). The New York-based investment management company VanEck has proposed a bitcoin-linked ETF vehicle alongside its partner, SolidX. While the SEC has rejected past attempts at launching cryptocurrency ETFs (the Winklevoss brothers' bitcoin ETF was shot down on two different occasions), analysts have argued that VanEck's product is different. In this article, we'll explore what sets this project apart and what to watch for as the SEC's decision becomes public.
Background of the ETF
VanEck first began its development of the bitcoin ETF about three years ago, according to a report by CoinDesk. SolidX, a separate fintech company, began working on its own bitcoin ETF at the same time. The partnership between VanEck and SolidX was announced only in June of 2018, but it has had the effect of inspiring confidence in the project.
Gabor Gurbacs, director of digital asset strategy for VanEck, suggests that his company has "addressed market structure issues," adding that "this is a chance for regulators to bring bitcoin under existing frameworks and protect investors." Gurbacs argues that one important distinction between VanEck's products and previous efforts at bitcoin ETFs is that this fund "is an insured product." This means that the physical bitcoins backing the shares of the fund would be covered in the event of "theft and hacks and losses of all sorts."
Why is this potentially such a game-changing difference? The SEC has indicated previously that it holds concerns about the stability and security of the cryptocurrency marketplace, with the possibility of theft, fraud and price manipulation ultimately proving to be too risky to allow for proposed ETF products to reach investors. Supporting the bitcoin holdings that back the ETF could be a crucial step in inspiring confidence among regulators. (See also: Reasons Why a Bitcoin ETF May Arrive Soon.)
For Phil Bak, former managing director of the New York Stock Exchange and now CEO of Exponential ETFs, the key to VanEck's product is something else entirely. Bak believes that VanEck and SolidX have crafted an ingenious method of weeding out non-accredited investors. "They've announced that they're going to set the price to $200,000," he explains, "which means you can't buy a fractional share. It means the minimum notional amount that an investor can put into the bitcoin fund is going to be $200,000, which means that by definition anybody who's trading the fund is an accredited investor." Thus, the ETF is specifically focused on institutional investors, with Gurbacs confirming as much. (For more, see: Three Points of Difference Between Bitcoin ETFs and Commodity ETFs.)
The SEC Decision
As of this writing, the partnering exchange (the Cboe BZX Exchange in this case) has filed for a "rule change" with the SEC as a means of including the fund in its listings. After the proposal and an open comment period, the SEC can do any of several things as early as Friday. First, it could either approve or deny the application outright. A blanket approval is seen as highly unlikely by most analysts and even the developers of the product itself. The SEC could also punt the decision down the road, saying that it needs more time to review. The SEC has already done this with several other bitcoin ETF proposals in the past few months.
Perhaps the best reasonable outcome for supporters of VanEck would be an approval from the SEC that then pushes the petition over to the Division of Corporate Finance in order to approve partnering companies. Gurbacs explained that the VanEck team is prepared for a lengthy back-and-forth. "I think that what most people don't understand is that there's a formal process where you go back and forth with the regulators ... they might say, 'hey, let's work on this particular topic like pricing,' and they'll call us and we'll look at our indices."
For those viewing the process from the outside, one key is not to assume the worst if the product is not approved wholesale at first. Considering that this approval process has not happened before, it may take many months. If it continues to develop without an outright rejection, that alone is a promising sign. (For additional reading, check out: SEC Considers Rule Change to Allow Bitcoin ETFs.)