The SEC’s Division of Trading and Markets exercised its delegated authority to institute proceedings to determine whether to approve or disapprove a rule change proposal submitted by Cboe BZX Exchange, Inc. to list and trade commodity trust shares of the VanEck SolidX Bitcoin Trust. Similar proposals have thus far failed to gain Commission approval, although several related exchange traded product (ETP) proposals will get Commission review and the SEC’s latest order regarding the SolidX bid will give members of the public a chance to comment on SolidX and the nature of Bitcoin markets (Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Instituting Proceedings to Determine Whether to Approve or Disapprove a Proposed Rule Change to List and Trade Shares of SolidX Bitcoin Shares Issued by the VanEck SolidX Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, Release No. 34-84231, September 20, 2018).
SolidX features. VanEck’s SolidX trust would seek to reflect the price of Bitcoin (less trust expenses) by tracking the MVIS Bitcoin OTC Index. SolidX Management LLC would be the sponsor and the trust will be custodian of any Bitcoin, while Bank of New York Mellon would serve as administrator, transfer agent and custodian (cash). Foreside Fund Services, LLC and Van Eck Securities Corporation would team up to provide marketing services, with Foreside focusing on creation/redemption baskets.
Bank of New York Mellon, as administrator, would use the MVIS Bitcoin OTC Index in calculating the trust’s net asset value (NAV). However, the various Bitcoin ETP proposals submitted thus far have included more complex methods to calculate NAV in some circumstances. SolidX would be no different; if the MVIS Bitcoin OTC Index is unavailable, the trust would rely on several valuation methods to be employed by the sponsor, SolidX Management, including, as a last resort, the sponsor’s "best judgment of a good faith estimate of the bitcoin market price."
A key aspect of the SolidX trust would be its use of a proprietary list of counterparties. Eligible counterparties would consist of hedge funds, family offices, and other wealth mangers or wealthy individuals. The counterparties would be subject to the trust’s anti-money laundering and know-your-customer compliance requirements and would supplement the bulk of the trust’s trading on OTC platforms. Moreover, unlike many Bitcoin ETP proposals, SolidX will obtain insurance against the loss or theft of its Bitcoin, thus offering its investors a modicum of protection. SolidX would further employ several price transparency measures (website disclosures, last-sale price quotes, plus the intra-day indicative value and NAV).
The trust also represented that the Bitcoin ecosystem is geographically dispersed and resistant to manipulation, including that Bitcoin lacks material, nonpublic information and Bitcoin trades continuously at slower speeds than other ETP products. BZX also would use its derivative products surveillance procedures to monitor SolidX shares and may also leverage data from the Intermarket Surveillance Group. BZX also claims to have a surveillance sharing agreement with Gemini Exchange; however, in disapproving the Winklevoss ETP, the Commission questioned whether Gemini was a regulated market of significant size, citing, among other things, Gemini’s low volume, which could not support authorized participants’ needs regarding basket creation and redemption.
18 questions. Given the Commission’s disapproval of the Winklevoss Bitcoin Trust’s bid to list and trade its shares, any new ETP proposals would presumably face an uphill battle to gain SEC approval. Specifically, SolidX has already reiterated many of the same arguments the Winklevoss Bitcoin Trust made and which the Commission rejected. Still, the Trading and Markets Division is giving SolidX a chance by inviting public comment on 18 questions with numerous subparts that thematically divide into several categories:
- What characteristics of Bitcoin make it resistant to manipulation versus other commodities-based ETPs?
- Whether Bitcoin futures markets and Bitcoin derivatives markets, including current volume in these markets, impacts the potential to manipulate Bitcoin?
- Should an ETP value Bitcoin based on a proprietary, non-public index such as the MVIS Bitcoin OTC Index?
- Will SolidX’s use of OTC Bitcoin markets, which are private and not regularly reported, plus the use of a proprietary counterparties list, impact NAV calculation and/or the ability of market makers to engage in arbitrage? As an aside, it is the arbitrage mechanism that allows an ETP to keep the traded price of its shares close to its NAV.
- How accurate is the representation that, on average, U.S. Dollar OTC Bitcoin trading volume is 50 percent of global Bitcoin trading volume in U.S. Dollars on U.S. Dollar-denominated Bitcoin exchanges?
- Is Gemini Exchange a market of significant size? Is it reasonably likely that a manipulator would have to trade on Gemini Exchange? Would trading in SolidX shares have an outsized influence over prices on Gemini Exchange?
- Is the trust correct that trading in its shares will emphasize institutional investors over retail investors, who presumably would be priced out of the market? Will broker-dealers engage in retailization of the trust by offering fractional shares?
- Will SolidX’s proposed initial 100 shares outstanding provide sufficient liquidity? Is it appropriate for the trust to have fewer outstanding shares than the minimum required by BZX’s rules?
- Will the trust’s plan to obtain insurance for its Bitcoin holdings impact trading in the trust’s shares or in the underlying Bitcoin?
Commission personnel changes. The Division of Trading and Markets recently disapproved Bitcoin ETP proposals involving ProShares, GraniteShares, and Direxion. All three funds would track Bitcoin futures contracts and allow long and short (inverse) investments; Direxion’s fund, however, would employ leverage. The Commission has indicated that it will review the disapprovals (ProShares, GraniteShares, and Direxion).
It remains to be seen whether the Commission will ultimately reach a different conclusion than it did regarding the Winklevoss Bitcoin Trust, a 3-1 decision Commissioner Hester Peirce dissented from on grounds that the Commission had missed an opportunity to let trading of a Bitcoin ETP’s shares help to thwart manipulation and that the Commission was otherwise hindering financial innovation. The addition of Commissioner Elad Roisman brings the Commission to full strength and potentially adds a new dynamic to the Commission’s review of the ProShares, GraniteShares, and Direxion proposals. The Commission, however, will once again be short one member when Commissioner Kara Stein leaves by the end of 2018.
The release is No. 34-84231.
Companies: Cboe BZX Exchange, Inc.; VanEck SolidX Bitcoin Trust
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