SEC rejects Grayscale Bitcoin ETF application [pdf]
sec.gov
sec.gov
When applying for an ETF you have to prove that the underlying cannot be easily manipulated, and is evolving in a fair market.
The current ETFs are based on BTC futures from CME, which is a high quality, regulated, futures exchange.
The SEC is basically saying that the spot BTC market cannot be trusted, is not regulated enough, subject to potential manipulation (as defined by Grayscale of what is BTC spot market).
There are points to be made for the SEC's arguments, depending on what Grayscale defines as being "BTC spot". I did not read their application but I can guess they would have to prove the spot market reference price (the ETF index) is a somewhat aggregated value based on multiple markets avg(binance, uniswap, sushiswap, coin base, ...) and failed to convince it could be trusted. Considering most of these markets are beyond SEC's reach, it sort of makes sense.
There are also arguments in favor of Grayscale, mainly because the future price is based on the spot price, so a manipulation on the latter would reflect on the former.
ETFs to the contrary are much more popular by retail traders and frequently used in a personal pension accounts. The investment objectives of the ETFs are preservation of the capital, income, and growth.
So the issue of the easily manipulated spot price is less problematic for derivatives/futures, and much more problematic for securities/equities/ETFs.
CFTC has the mandate to prevent manipulations in the underlying spot markets for any derivatives traded in US. The fact the CME (and other exchanges) introduced Bitcoin futures, put CFTC in charge of the spot markets too.
ETFs are funds that trade like stocks. That’s basically it.
Yes, stocks and other exchange traded products like ETFs (especially their leveraged and short verities) can also be used for trading profits as an investment objective. That what pros and retail day traders are doing. But I doubt lots of people day trading in their personal pension accounts.
To me this is everything. If you can't trust spot, then you can't trust futures because futures price will immediately start moving towards the manipulated spot price. Therefore, in my opinion, this is just a game the SEC is playing for whatever reasons.
The problem isn’t solely a manipulated spot price. It’s there being no spot price. If exchanges start diverging, the mechanisms holding the ETF stable collapse or become fraudulently misleading. (For example, if Grayscale references the Gemini price for unit creation/destruction and the Gemini price is double that on Kraken.)
This will create havoc in the futures market, too. But the havoc is pushed to the periphery. The contract participants bear the pain. The central clearinghouse will continue creating a value for the future, and that value will port truly to the ETF. That leaves all the central mechanics, from borrow/lend to derivatives and even settlement, unharmed. (If the central clearinghouse halts, then everything halts simultaneously. Totally different from a commodity market.)
In the case of direct spot manipulation, spot would in that case lead futures which would no doubt follow suit to whatever price spot had. Regardless, I'm sure there is much arbitrage between them, so saying one is trustworthy and the other is not, is silly in my opinion. Iow, if there is a problem with one then neither should be allowed, not one or the other.
The whole crypto space has been trying to have it both ways and get the veneer of well regulated assets on regulated exchanges, without having to face any regulation on the spot or spot exchanges themselves.
It is akin to me deciding to start an ETF in the US, listed on NYSE, linked to Topps baseball cards which I trade on eBay and hold in a vault in my moms basement. Not gonna fly with the SEC.
There is a case to be made that BTC spot and future are not delta one. I did not check specifically for BTC, but often in crypto the liquidity on futures is much higher than on spot, which makes the futures market much less sensible to market manipulation, flash crashes, whale dropping, etc.
Holdings are also much clearer and easier to assess for regulated futures than for spot.
The reality is a lot of the vol on btc is due to liquidations. On one hand, volatility, on the other, crypto liquidations are much more fair than stock market margin.
>The Commission has long recognized that surveillance-sharing agreements “provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur” ...
I guess bitcoin is inherently a bit hard to surveil what with much of the trading being offshore and unregulated.
The SEC being in a position to use its own arbitrary discretion to gatekeep an investment’s existence and availability to retail investors is pure happenstance that only exists in a subset of ETFs due to the F part meaning Fund.
Otherwise the SEC specifically does not judge the merit of investments, it advocates for 100 pages of disclaimers and says “we did it guys! We protected investors!” For the issuer, most SEC compliance is simply posting a notice to the SEC, not asking them for permission.
It is an extremely broad interpretation of a multitude of investment acts that has the SEC looking deep into the spot markets of an entirely different asset class to make any arguments at all. And its also their choice to do that, its their choice to act out of character specifically for crypto (they stonewalled gold etfs for a long time too though).
Why do you believe that? Exchanges have been caught lying and cheating multiple times.
Talking here about all the major exchanges with actual volume (Coinbase, FTX, Binance, etc) of course might not apply to some scammy third-tier exchanges with no volume.
Well I don't think you quite imagine the sheer amount of requirements a regulated exchange has to through.
Though I don't think major crypto exchanges (Binance, Coinbase,...) are blatantly cheating per se, they are still light years away from having the same level of compliance as traditional SEC regulated exchanges.
> if the orders were fake it would be known
Also, you seem to only consider obvious fraudulent behaviors, but there are literally millions of ways to exploit order flow when you're an exchange or broker, that are completely impossible to see from the outside.
None of these trade BTC/USD spot. Referencing them just punts the question to the legitimacy of UNI and ETH spot.
Now we have people mad that SEC won't rubber stamp a spot bitcoin ETF to allow more dumb money to enter the crypto space as exit liquidity with fewer clicks.
We should be happy the SEC is taking a serious look in advance in order to do some prevention, rather than closing the doors after the horse has bolted which is the usual course of action..
Which APs can’t do if the spot price is untrustworthy.
Hum, yes, I mean, it's not even a matter of believing it or not, it's well known fact. We had at least 5 BTC flashcrashes in 2021, caused by massive sell-off from individual holders, which often trace back to crypto funds.
Bear with me though, I'm not saying the overall BTC price is manipulated _all the time_. What I'm saying is that there are a _lot_ of individual BTC spot markets, with very different liquidity, market makers, and participants.
Some players have historically manipulated BTC in the past, and will likely continue in the future. The reason of these sell-off are open to speculation, but are often attributed to tentatives of triggering short squeezes by mass liquidation. Or just triggering a massive buy back from others stop losses. etc
These types of manipulations are possible only when an individual holder can have a significant market impact because of the low liquidity present in the book, or if market makers have loose liquidity constraints. Both are true for pretty much all BTC spot markets.
The future market is largely unaffected since there's so much more liquidity on BTC futures, no holder could dry it out in an instant. Also, in the case of CME futures, the participants are regulated, so market manipulation is pretty much out of reach anyway and would instantly trigger an investigation.
At the time of this writing, there's just ~$700k on the top of the spot BTC/USDT book of Binance, while there's around $6M on the perpetual future book. Imagine how dry the fiat USD book would be. Anyone with $500k worth of BTC would crash it at will.
There are tonnes of papers showing it was in specific cases [1][2]. In the general case, we simply don’t have the data. (For example, everything connected to Tether.)
> why is an ETF on a Future on Spot Ok, but a ETF direct on spot is not?
Futures are a punt to the CFTC. Also, the failure mode of a futures-based ETF is cleaner.
A leveraged ETF based on futures will price truly to the futures even if the futures’ prices lose meaning. (The central clearinghouse for future ensures that while the price may be meaningless, there will be an agreed-upon value for price.) An ETF based on spot will need to be frozen if a handful of exchanges go under and the price of Bitcoin starts varying by 90% depending on which exchange one is looking at.
Such an event will also wreak havoc on the futures market. But the future-based ETF will continue settling against that broken market in a way the spot ETF will be unable to. That means everyone who borrowed or lent or wrote derivatives on or pledged collateral with their ETF units will be able to happily continue on their way. That’s market stability, something crypto has so far not prioritised.
[1] https://arxiv.org/pdf/1902.01941.pdf
[2] https://www.tandfonline.com/doi/full/10.1080/13504851.2020.1...
The 2008 financial crises was because big banks where making loans with only loans as the backing. It was literally a house of cards that the SEC looked at and backed not because of economic reasons but because of the authority of the people behind it.
In 2008 the dumb money was told by their Realtor and licensed mortgage broker that they could afford the mortgage. Instead of thinking for themselves these people just assumed that the government wouldn't allow these mortgages to happen if they were a bad idea.
Maybe it isn't good to have stock brokers pitching ETFs that appear to be legit investments, to people who don't understand anything about crypto.
https://news.ycombinator.com/newsguidelines.html
(Your other comments in this thread seem vastly better and much more in keeping with the intended spirit of the site.)
[Will Argue SEC Violated Administrative Procedure Act and Securities Exchange Act of 1934]
https://www.globenewswire.com/news-release/2022/06/30/247173...
> As Grayscale and the team at Davis Polk & Wardwell have outlined, the SEC is failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934,” added Donald B. Verrilli, Jr., Grayscale Senior Legal Strategist and former U.S. Solicitor General. “There is a compelling, common-sense argument here, and we look forward to resolving this matter productively and expeditiously."
Given that the SEC has approved no other spot ETFs for BTC, I don't know how they can make the argument that the SEC has "failed to apply consistent treatment."
Unless they're claiming that spot ETFs for BTC as a whole should be treated identically to other spot ETFs, which feels inconsistent with their larger argument for approval (that the Bitcoin market needs to be brought into the regulatory fold, implying that it's currently amenable to manipulation.)
There are multiple types of securities offerings. The sec has historically denied the 1934 act etf's for bitcoin (spot or futures based) claiming they weren't comfortable with the guarantees it offers.. This is what Grayscale is based on. The original future's based etf that they accepted was based on the 1940's act which the sec explicitly said they preferred. Earlier this year the sec approved a 1934 futures based bitcoin etf. My understanding is that one of Grayscale's arguments is that it is unfair and arbitrary to deny their 1934 based etf when they just accepted separate one a few months ago and that clearly their concerns relating to the 1934 based offerings no longer exist.
Yes, and that is the crux of the argument: the Exchange Act requires the SEC to evaluate ETPs for the possibility of "fraudulent and manipulative acts and practices." In other words: the SEC lacks confidence that approving a spot ETF for Bitcoin would not further advance manipulation and/or fraudulent behavior in the Bitcoin market.
(You will note that the SEC is more than happy to allow ETFs that specialize in petrochemicals or defense contractors; there is no evidence whatsoever that this was a morally driven decision.)
Every new ETF application has just blithely ignored the previous reasons for refusal, and Grayscale ignored them too.
At this point, the blockchain industry is just playing dumb and pretending not to understand.
I feel like I’m missing something.
Th sec is fine with a futures based etf but for some reason doesn’t want a Spot etf.
Which is strange because Canada has multiple spot etfs.
Some arguments for not allowing a spot wtf is that the futures markets are regulated and smaller currently so a futures based wtf can’t grow as big as a spot one at the moment.
Those aren’t great reasons because a lot of spot markets are now hosted by regulated companies like coin and gemini and the he sec said that futures based etfs can hold some of the Canadian spot etfs f they can’t get enough futures contracts
Greyscale wins here by losing as it means they continue to get 2% a year in assets where as a spot etf would charge under 1%.
The Discount to NAV trade continues on, with a 30% discount waiting to be unlocked.
Funny story about this fund and its NAV. It helped sink the fund 3AC.
In 2019 and 2020 it was a very crowded trade to give them BTC and get units back that were locked up for 6 months. The units at the time traded at a premium to its NAV( ie you gave 1,000,000 in BTC and got back units worth 1,200,000).
Now the NAV has inverted such that the cost per share is less than the btc it holds due to funds like 3AC trying to get their money out. Lots of funds have lost alot of money trading this fund around, and if it was allowed to convert to an ETF none of those losses would have happened, and yet the SEC wont' allow them to convert for some reason :(
Interesting it was at a 100% premium to assets not so long ago
Grayscale it looks like was trying to launch a product directly linked to spot bitcoin, holding them in some sort of trust? Maybe SEC had concerns about custody..
Also, Proshares has historically been a big player in the ETF space, whereas Grayscale has.. as far as I can tell, a single ETF with ~$7M in assets.
Also, I wouldn't point to grayscale as an example of a good operator. Their Bitcoin trust is trading way below par.
Intuitively I’d think they are wildly similar, or correlated, but I’m sure I don’t know enough here to understand why I’m wrong.
The thing is that if you are willing to bet on the price movement of a token, futures are a much more cost and capital efficient way to do so.
- Its more capital efficient because you can leverage futures. Say you want an exposure of $1000 on the price of BTC and only have access to a spot market. You would need to actually buy $1000 worth of BTC, or use margin (a loan basically, but the interests are prohibitive). With futures, you would just need to maintain the required margin amount depending on your preferred leverage, so you could get that $1000 BTC exposure with a post of $100. For the same exposure of $1000, futures allows you to use less capital, or conversely with the same capital, you can have more exposure with futures.
- Trading fees are much lower on futures, since this is mainly a virtual, exchange-owned instrument. There is often no actual movement of the underlying when trading futures, especially if everything is settled in cash. Futures trading fees are often significantly lower than spot.
These advantages of futures often lead them to have _much_ more liquidity than the actual spot market, which in turn means they are much more stable.
What we see often on small marketcap coins is that the ownership of tokens is opaque. Regularly, some whales (sometimes even unknowingly) dump huge amounts of the coin on the spot market, which leads to flash crashes until market makers can provide back some liquidity. This is very unlikely to happen on futures, since the liquidity is so much higher, dumping some millions worth in the market wouldn't dry out the book all that dramatically.
I did not check numbers recently, but just to give you a rough idea, the daily traded amount on uniswap (spot, decentralized) should be around $1B/day, Binance spot should be around $10B/day, and Binance perpetual futures around $40B/day.
Futures are mainly OK because there is no custody nor settlement of the underlying itself. Everything is settled in cash.
In this respect, cash settled (inverse) crypto futures could almost be considered as having no link whatshowever with crypto currencies. This fine point is actually what allowed brokers to propose crypto futures ahead of any regulation.
The earliest uses have been primarily agricultural, allowing farmers to sell grain in advance for cash now and use that cash to fund operations in order to grow the grain.
https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cry...
https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cry...
By comparison, with Grayscale, who knows how custody works and what exchange exposure they may have.
CME Bitcoin futures are cash settled, it doesn’t settle in actual BTC.
Grayscale was applying to be a "physical" ETF, which would hold and buy and sell actual coins.
After the big "fortune favors the bold!" ad blitz of last year the pot of greater fools willing to pour money into cryptocurrency (without understanding it) is probably pretty tapped out. At this point the only way to keep the music going is to find a way to tap and drain pension funds, endowments, IRAs, and other sources of more conservative money that reside in public markets.
Keep that from happening and the Ponzi collapses unless they can find some other source. The only other one I can think of is flight capital from China and Russia. That's always been a factor in propping up crypto but the thing is they're not HODLers. They don't care about propping up crypto, just using it to get money out of places with capital controls. Once the money is out they're likely to liquidate on the other side. Wire transfer is one of the few areas of actual utility in cryptocurrency but it doesn't really prop up the Ponzi.
The same applies to money laundering. They're using crypto as a vehicle to launder money but once laundered they want the money back in generally usable form. They're not HODLing.
The TL;DR is that the SEC does not believe that the Grayscale ETF can meet the requirements stipulated for an "Exchange-Traded Product" under the Exchange Act. In particular, the SEC found that a proposed rule change that would have allowed for the ETF violated the requirements of the Act under Section 6(b)(5).
All of this is covered on Page 2. Subsequent pages cover precedent, various conditions under which other ETFs have been approved ("surveillance-sharing agreements"), and an extended justification for rejecting the proposed rule change.
> Grayscale has the power to flip this dynamic. Issuers of closed-end funds can redeem shares at the NAV; this allows investors to sell their shares back to the trust, which would close the discount. Using the example above, investors could exchange their $0.85 trust shares in for the $1.00 of Bitcoin it represents.
[…]
> Yet the redemption option might be unpalatable for Grayscale. It would result in lower assets under management, as Grayscale would need to deliver Bitcoin to investors trading in its shares. The firm charges a whopping 2.00% management fee on trust shares (another factor that drives differences between the share price and the underlying Bitcoin), which it may be reluctant to give up with a smaller asset base.
https://www.morningstar.com/articles/1068472/the-problems-wi...
The spot bitcoin price used to compute the ETF is based on unregulated exchanges in a sector that is concentrated, and rife with fraud and market manipulation (which the entity applying for the ETF does not deny!). The guard rails to make sure that the ETF is insulated from fraud and market manipulation are... not really there. Basically "we believe the exchanges we use to compute Bitcoin price information are free from fraud and market manipulation."
No person in Congress ever said “hey you know how you don't judge the merit of investments, by design, well we want to add in subsection 8) to make an exception to that for ETFs full of spot commodities”
They are desperate to pump Bitcoin prices its frankly comical.
Thus - the game of spot ETF.
Grayscale isn’t rushing either, because they are farming management fees.
Only ones losing is “investors”. The ones that the SEC suppose to protect.
The SEC's response here is actually very even handed: they agree that there are advantages to a spot ETF for Bitcoin on a regulated exchange. The ruling observes that the presence of advantages is not sufficient: there must be proof that the rule change would not enable "fraudulent and manipulative acts and practices." They've also laid out how that proof might be obtained in the future: through a "surveillance-sharing agreement" that ensures transparency concerning the underlying assets.
This is law, not an undergraduate philosophy of logic class. "Proof" in these contexts means providing supporting or contradictory evidence; the SEC is stating that a company that wishes to offer a spot Bitcoin ETF must provide sufficient evidence that contradicts the other evidence that Bitcoin's market is susceptible to fraud and manipulation.
Edit: The SEC lays out some of this evidence on pages 22ff.
The SEC is gatekeeping one specific market.
Right. That’s the point. Indictments and settlements.
Meanwhile, we know e.g. Tether and its affiliates lied materially, they said as much to the New York DA. Yet no enforcement action. No oversight.
The SEC is gatekeeping this specific market based on an accidental and optional administrative purview that should be corrected.
I have heard some people say that they wanted to become an ETF because the trust doesn't allow them to sell the bitcoin, only hold it. Is that true? I really don't understand what's happening.
How would a bitcoin ETF be riskier than stuff which already exists like UVXY, which has lost 99.9999% of it value since inception and has even more volatility
UVXY is one of those things only meant to be held a short time (1 trading day or less). Historical pricing isnt really meaningful (its shown as being priced over $1B per share at inception on several sites, which is wrong).