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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.
Thread.
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.
Thread.
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.
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.
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.
- 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.
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.
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.”
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."
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.
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.
https://twitter.com/jchervinsky/status/1032431885413228545
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.
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.
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.
https://twitter.com/jchervinsky/status/1041712161595293696
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…
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.
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.
Bitwise hasn't had a proposed rule change filed yet, so it isn't under active consideration by the SEC.
https://twitter.com/HHorsley/status/1035370121907265536
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.
The rejections are under review by the full SEC. As I explained earlier in this thread, the review process has no formal deadline.
https://twitter.com/HesterPeirce/status/1032725874314027008
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.
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?
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.
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.
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.
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.
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.
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.
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.
Anyway, it's not either/or. You can root for them both.
https://twitter.com/gaborgurbacs/status/1042041283194310661
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.
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.
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.
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.
The deadlines for comments responding to the SEC's questions will be set when this order is formally published.
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