Jake Chervinsky Profile picture
Sep 20, 2018 30 tweets 8 min read Twitter logo Read on Twitter
0.0/ ETF FAQ.

My answers to some common questions about the SEC & the approval process for #bitcoin & #crypto ETFs. If you have a question I didn't address, feel free to ask here & I'll add on.

1.0/ Q: "Who decides whether to approve or deny an ETF?"

The initial decision is made by SEC staff in the Division of Trading & Markets. If the staff denies an ETF proposal, the ETF sponsor can file an appeal, which will be decided by all of the SEC Commissioners.
2.0/ Q: "What's the process & timeline for the SEC to decide on an ETF?"

When a proposal is filed, the SEC publishes it in the Federal Register (the government's official journal) & solicits comments from the public. It then has 45 days to approve, deny, or delay a decision.
2.1/ The SEC can delay up to three times:

- 45 more days if they need more time
- 90 more days if they want the sponsor to address "grounds for disapproval"
- 60 more days if they need more time again

The final deadline is 240 days after publication in the Federal Register.
2.2/ If a sponsor files an appeal, the SEC Commissioners have no official deadline to make a decision. They can take as long as they want. Same thing for a review.

For example, the SEC took ~16 months for the Winklevoss appeal, but only ~6 months for an appeal re: the CHX.
2.3/ The only limitation is the Administrative Procedure Act, which allows a federal court to "compel agency action unlawfully withheld or unreasonably delayed."

So, if the SEC delays "unreasonably" on an appeal or review, an ETF sponsor can get a court order forcing a decision.
3.0/ Q: "Why hasn't the SEC approved a bitcoin ETF yet?"

The main concern is market manipulation. Exchange Act Section 6(b)(5) requires that an exchange's rules be designed to “prevent fraudulent and manipulative acts and practices” & “protect investors and the public interest.”
3.1/ As a result, the SEC won't allow exchanges to list or trade bitcoin ETFs without adequate measures to "detect and deter fraud and manipulation."

To be specific, the SEC wants ETF sponsors to have "surveillance-sharing agreements with a regulated market of significant size."
3.2/ These quotes are from the Winklevoss appeal denial, the best source of information about the SEC's take on bitcoin ETFs.

That's because the SEC staff at the Division of Trading & Markets will likely rely on the precedent set by the Commissioners when making ETF decisions.
3.3/ In fact, the SEC staff pulled heavily from the Winklevoss appeal denial when they rejected the ProShares, GraniteShares, and Direxion ETF proposals last month.

3.4/ My sense is the current SEC won't approve an ETF until it gets access to enough trading data from the underlying markets to detect & prosecute fraud & manipulation.

I say the *current* SEC because its stance could shift as Commissioners finish their terms & are replaced.
4.0/ Q: "What ETF proposals are pending now and what's their status?"

At this point, the only ETF left standing is VanEck/SolidX. If you want to learn more, check out @gaborgurbacs, VanEck's Director of Digital Asset Strategy.
4.1/ Many people see VanEck/SolidX as the most exciting ETF proposal of 2018.

That's largely because it's commodity-backed: it would buy & custody actual bitcoin instead of tracking price through derivatives.

This sounds like "good" financialization: forbes.com/sites/caitlinl…
4.2/ The SEC's next deadline for VanEck/SolidX is September 30. I expect an announcement by next Friday.

The SEC could delay its decision for another 90 days until December 29. It could then delay for another 60 days until February 27. That would be the absolute final deadline.
4.3/ In addition to VanEck/SolidX, there's also the Bitwise HOLD 10 ETF, which would hold a mix of the top ten digital assets weighted by market cap.

Bitwise hasn't had a proposed rule change filed yet, so it isn't under active consideration by the SEC.
4.4/ Finally, there are the ProShares, GraniteShares, and Direxion ETFs, which SEC staff rejected on August 22.

The rejections are under review by the full SEC. As I explained earlier in this thread, the review process has no formal deadline.

5.0/ Q: "What will the SEC do with VanEck/SolidX for the September 30 deadline?"

I don't know, but if I had to guess I would put the odds at 70% chance of delay, 29.9% chance of denial, and 0.1% chance of approval.

Not legal / financial advice. Don't trade on this & don't @ me.
5.1/ I think another delay is most likely because that's what the SEC has done for every other bitcoin ETF proposed in 2018.

A delay would allow the SEC to get more information from VanEck. For example, what surveillance-sharing agreements does VanEck have with exchanges?
5.2/ VanEck also proposes a different kind of ETF than the ones recently rejected, so I'd expect SEC staff to have more questions before making a final decision.

Plus, they have nothing to lose by delaying. It makes them look thorough & there's no pressure to decide immediately.
5.3/ That said, it's possible the SEC decides the market just isn't ready for a bitcoin ETF given all the issues surrounding market manipulation. In that case, VanEck could be denied next week.

I can't *completely* rule out approval at this stage, but that would be shocking.
6.0/ Q: "What do you think about Hester Pierce's dissent & statement?"

On a personal level, I appreciate her support for innovation & respect her take on the proper role of the SEC. Its job isn't to eliminate *all* risk, but rather to enable investors to make informed decisions.
6.1/ As a legal matter though, I'm not sure how viable her position is.

Basically, she says Exchange Act Section 6(b)(5) only lets the SEC consider if the ETF *itself* could be manipulated. She says the SEC has no authority to look into manipulation in the underlying markets.
6.2/ Sounds good, but seems inconsistent with ~15 years of SEC precedent. Just look at footnote 96 of the original Winklevoss disapproval order for examples: (sec.gov/rules/sro/bats…)

Reversing that much precedent is a hard sell, though I wouldn't mind taking the case to court.
7.0/ Q: "Why should we care about ETFs when @Bakkt is coming soon?"

In my view, all of these financial vehicles are important. The goal is to make crypto investable by more people & institutions. I'm not sure it matters if that happens through an ETF, Bakkt, or something else.
7.1/ That said, Bakkt is a new concept while ETFs are a proven, trusted device. There are many reasons to be interested in ETFs given all the benefits they offer (as long as they're designed well).

Anyway, it's not either/or. You can root for them both.

8.0/ And of course, immediately after (or just before) I posted this thread, the SEC delayed its decision on the VanEck ETF: (sec.gov/rules/sro/cboe…)
8.1/ The SEC asks some tough questions about VanEck's proposal. Eighteen multi-part questions over seven pages, to be exact.

If you want to know *all* the reasons why the SEC doesn't want to approve a bitcoin ETF in excruciating detail, read pages 11 through 17 of this document.
8.2/ Question #13 is the one that killed all the derivative-backed ETFs (and to a lesser extent the Winklevoss ETF too).

It's not encouraging to see the SEC ask if the bitcoin futures markets are "of significant size" despite having already concluded last month that they're not.
8.3/ In fact, several of these questions appear rhetorical: designed to make a point rather than solicit information.

For example, Question #14 asks "whether the Gemini Exchange is a market of significant size." In the Winklevoss appeal denial, the SEC explicitly said it's not.
8.4/ To clarify, the new deadline for the SEC's decision is December 29: that's 180 days after the proposal was first published in the Federal Register on July 2.

The deadlines for comments responding to the SEC's questions will be set when this order is formally published.

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More from @jchervinsky

Sep 26, 2018
0/ A quick summary of today's ruling in the My Big Coin case.

In short, a federal court says *all* digital currencies are commodities & the CFTC has jurisdiction to prosecute fraud & manipulation in crypto. In my view, the ruling is deeply flawed.

1/ Background:

According to the CFTC, the defendants sold a crypto called "My Big Coin" by falsely claiming it was backed by gold (it wasn't).

They also pretended it was actively traded on exchanges (nope) & made up arbitrary prices to raise $6 million from defrauded investors.
2/ The CFTC filed a lawsuit alleging violations of the anti-fraud & anti-manipulation provisions of the Commodity Exchange Act ("CEA").

The defendants filed a motion to dismiss arguing the CEA doesn't apply because My Big Coin isn't a commodity, so the CFTC has no jurisdiction.
Read 16 tweets
Sep 11, 2018
0.0/ A lot of #crypto news today from the securities enforcement world:

- DOJ goes to trial on ICO-related securities fraud charges
- SEC charges broker-dealer & hedge fund with securities violations
- FINRA charges broker with fraud & dealing unregistered securities

1.0/ Let's start with DOJ. Today's news relates to a federal criminal case in the Eastern District of New York: United States v. Maksim Zaslavskiy.

Zaslavskiy was charged in November 2017 on three counts of securities fraud in connection with two ICOs: "REcoin" and "DRC."
1.1/ DOJ says Zaslavskiy lied to investors when he sold these ICOs.

According to the indictment, he told investors that both coins were backed by real world assets: he allegedly claimed REcoin was backed by real estate & DRC was backed by diamonds.
Read 22 tweets
Sep 5, 2018
0/ A few thoughts on @ShapeShift_io's decision to start collecting users' personal information through a mandatory membership program.

In short, this is how regulators silently invade crypto.

1/ Historically, ShapeShift has enabled users to convert between a variety of digital assets with total anonymity.

The service reflected the principles of its CEO, @ErikVoorhees, a true bitcoiner who speaks passionately about financial privacy & separating money from state.
2/ The thing is, the US government doesn't exactly agree with Erik's point of view.

Modern enforcement agencies rely heavily on financial surveillance. The concept of anonymous crypto exchanges & transactions is a genuine nightmare for regulators & investigators.
Read 18 tweets
Aug 23, 2018
0/ The SEC killed *all* of the pending derivative-backed #bitcoin ETFs today. Why did they do it, and what does it mean?


1/ All eyes were on the SEC this week, as the final deadline to approve or reject the two ProShares bitcoin ETFs was tomorrow, August 23.

Most of us on #cryptotwitter were expecting the ETFs to be rejected.

2/ But we weren't expecting the SEC to also reject *seven* other derivative-backed ETFs proposed by GraniteShares & Direxion. Those ETFs weren't due for final decisions until September 15 and 21 respectively.

The only ETF left now is the VanEck/SolidX commodity-backed offering.
Read 11 tweets
Aug 17, 2018
0/ The SEC's final deadline to approve or deny the two ProShares Bitcoin ETFs is next Thursday, August 23 (sec.gov/rules/sro/nyse…). My thoughts on two questions:

- How will the SEC make its decision?
- Would these ETFs even be good for bitcoin?

1/ In December 2017, the NYSE Arca exchange filed a proposal with the SEC to list and trade two ETFs issued by ProShares:

- ProShares Bitcoin ETF
- ProShares Bitcoin Short ETF

Both would use derivatives (futures, options, and swaps) to track bitcoin's daily price movements.
2/ These ETFs are important: they're the first ones that the SEC will approve or deny in 2018 & will set the stage for others in coming months.

Of course, nobody knows what the SEC will decide, but we can use their recent statements to figure out what factors they'll consider.
Read 17 tweets
Aug 14, 2018
0/ Let's talk about @Ripple litigation & the slow journey toward answering the question: "is #XRP a security?"

Before you ask, I don't plan to discuss my own opinion on this issue. I'd rather leave that to the courts, as I'll explain here.

1/ Ripple is currently defending four cases in California courts:

- Two state cases in San Mateo County, brought by plaintiffs Zakinov & Oconer
- Two federal cases in the Northern District of California, brought by Coffey & Greenwald

All four cases are securities class actions.
2/ The plaintiffs allege basically the same thing: XRP is a security and Ripple violated state & federal law by failing to register it before offering, promoting, and selling it to retail investors.

If you want more details, read the Zakinov complaint:
Read 19 tweets

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