Bitcoin ETF – What Could Be SEC Decision On VanEck proposal?

Last year alone a combined 12 Bitcoin ETFs were submitted to the SEC, of which 11 were rejected. The proposals which got rejected proposed launching a Bitcoin ETF either using cryptocurrency exchanges to calculate the base price of the asset or relying on the Bitcoin futures market price.

The rejection, according to SEC was based on the fact that the futures market and exchanges are not mature and their market size is not significant. Therefore more likely prone to manipulation. Also citing concerns over current exchanges capability to monitor, detect and deter fraud and manipulation.

A report conducted by Blockchain Transparency Institute last month concludes that over 80% of BTC pair trades in the majority of the exchanges are wash trades. Therefore, the unethical trading behavior in exchanges makes it highly manipulative and questions lacking regulation.

The proposal submitted by VanEck last year differs from others which drives base value neither from crypto exchanges nor from future markets. VanEck proposes using data from the over-the-counter (OTC) market to calculate the Bitcoin base price, which is said to be bigger than the cryptocurrency exchange market in terms of volume and trading activity.

A report earlier in 2018 produced by the Tabb Group estimated daily bitcoin OTC volumes at $12B globally. Over-the-counter (OTC) Bitcoin trading can be 2-3 times more than the volume done on exchanges. The OTC market can, therefore, be argued as a good reference point for where the price of bitcoin is really heading.

How the OTC market can affect the price of bitcoin & may affect the approval of a Bitcoin ETF.

Now you might think given the OTC trades happening away from exchanges, in practice, it should not affect the price of bitcoin in exchanges. Maybe the following case will let you think again about it.

Consider there is a large buyer (or seller) making inquiries in the OTC market, the word most likely will get out. For example, an investor could reach out to several brokers inquiring for a bid to sell a significant amount of BTC without having any intention to sell. This large sell inquiry could drive down the price of bitcoin at which point the investor could buy BTC for cheaper on exchanges.

Therefore, it cannot be proved that no market manipulation can take place in OTC. It is prone to unethical trading behavior due to its relative anonymity and lack of regulation. This could complicate the decision making for the SEC. The decision for the VanEck Bitcoin ETF proposal has been long pending and the final decision to approve or reject Bitcoin ETF is expected on 27th Feb 2019.

Given the above constraints, the probability of VanEck Bitcoin ETF approval by the SEC remains low. A pro-crypto SEC commissioner Hester Peirce previously said that investors should not wait on a Bitcoin ETF because it may take days or years for the commission to approve it.

Whether the ETF gets approved or not, the filing of a VanEck Bitcoin ETF will provide more clarity on the subject. Irrespective of what SEC decides on 27th Feb 2019, It will be interesting to find SEC take on the OTC market and will help to a better structuring of ETFs in future proposals.

Note: Earlier this year, Bitwise, a cryptocurrency hedge fund also filed an ETF proposal. In the Bitwise proposal, the index proposes to track the realistic price of Bitcoin on the basis of prices from exchanges, futures markets, and over-the-counter (OTC).