The Securities and Exchange Commission did not approve the first physical bitcoin ETF, the Winklevoss Bitcoin Trust (COIN), after more than three years since the filing first entered the regulatory pipeline. In a 38-page statement released Friday, regulators cited concerns over bitcoin’s unregulated status, and the difficulty of preventing manipulation and providing oversight in this type of market. For those reasons, they were saying no to the first proposed physical bitcoin ETF.
The ruling was a massive setback for COIN. But COIN isn’t the only physical bitcoin ETF awaiting approval, and the SEC will have to weigh in on each one of them. Mike Venuto, co-founder and chief investment officer of Toroso Investments, has been closely following the bitcoin space, and shared with us what he sees happening ahead. His firm owns exposure to bitcoins via Grayscale (GBTC) on behalf of its clients.
ETF.com: First off, what was your broad reaction to the SEC ruling against COIN—was it a negative or a positive for the ETF market?
Mike Venuto: The ruling showed that our regulators have a deep understanding of the markets, of the benefits of ETFs, and they took the time to learn a great deal about bitcoin. I believe this is a positive for the ETF industry. Just the fact that a traditional mutual fund couldn’t even contemplate having a bitcoin mandate shows the innovation of the ETF structure.
The key aspect of bitcoins’ structure being unregulated, open sourced and essential crowd sourced or crowd hashed seems to be the focus of their liquidity concerns. Ironically, as pointed out by Dave Nadig [CEO of ETF.com], that nature is the key benefit to the bitcoin infrastructure.
So for right now, it appears the marriage between ETFs and bitcoins is on hold, but the engagement in my mind is still intact.
ETF.com: Specifically, the Winklevoss Bitcoin Trust (COIN) was not approved. But there are two other physical bitcoin ETFs in registration—from Solid X and Grayscale. Are those dead in the water as well?
Venuto: The proposal from Solid X appears to face extremely similar issues. I don’t believe bitcoins will be available anytime soon in the ’33 Act ETF structure. Now, Solid X understands the asset, and more importantly, the blockchain infrastructure and its applications, so I’m sure they will pivot.
The Grayscale proposal is substantially more complex and has repercussions to the entire ETF industry. GBTC already exists and trades OTC, often at premium or discount to net asset value due to the lack of easy creation and redemption.
Their filing notes: "The Trust is an ‘emerging growth company’ as defined in the Jumpstart Our Business Startups Act of 2012 (the ‘JOBS Act’).” This is something completely new because it is not simply a ’33 Act ETF, although they note in the filing it could potentially be treated as such for tax purposes, “assuming that the Trust is treated as a grantor trust.”
In other words, it appears they are asking to take an emerging growth trust and convert it into something more liquid with intraday creation and redemption. They’re asking for something logical, innovative and that could change the ETF landscape.
Essentially, anyone could use this process or precedent to launch any asset that gains mass appeal as an “emerging company trust” than convert to this new ETF structure.
In the end, I’d encourage all the parties, including the Winklevosses, to push forward and adjust. Three years may seem like a long time, but remember that leveraged and put-writing took even longer to gain approval.
ETF.com: After a quick plunge Friday, bitcoin prices have already recovered nicely. For all of the buzz this ruling had on Friday, how important is a bitcoin ETF at the end of the day? Should investors care?
Venuto: After the Fintech Marriage article I wrote, I received a lot of inquiries from traders. I told each one of them the same thing: “Don’t speculate. If you want to own, bitcoin do it, but don’t try to trade the news.” It’s not surprising to me that the GBTC [bitcoin price] has withstood pricing pressure because the demand is still high for investable access.
I would like to see a bitcoin ETF, so I’ll reserve judgment on whether it’s good or bad, but I know that efficient access to complicated investments is usually best in the ETF structure.
Contact Cinthia Murphy at [email protected]