The crypto market may finally be about to witness a successful application for a Bitcoin Exchange Traded Fund (ETF).
The Winklevoss twins have been trying to file since 2014, but the SEC turned them down – arguably due to their lack of experience and connections in the area.
However, the current applicant is a far more major play – the Chicago Board Options Exchange (CBOE).
The CBOE is one of the most important and influential financial institutions in the world, and has something that previous applicants don’t – insurance.
Major concerns within the SEC over the application have historically centered around catastrophe scenarios – what happens to investors if there’s a hack, or the private keys get lost? What happens in the case of fraud?
CoinCenter’s executive director Jerry Brito said:
“The Winklevoss ETF proposal was rejected because the SEC found that the significant markets for Bitcoin tend to be unregulated overseas markets that are potentially subject to price manipulation. But this creates a chicken and egg problem. How do we develop well-capitalized and regulated markets in the U.S. and Europe if financial innovators aren’t allowed to bring products to market that grow domestic demand for digital currencies like Bitcoin?”
The twins were turned down in 2017 along with SolidX who also filed for an ETF application. While the US aren’t the only country capable of providing one, at the time the other leading cryptocurrency markets like Japan and South Korea did not have practical regulatory frameworks and policies in place to govern the cryptocurrency market.
Things have changed however, with Japan now a leading nation in crypto regulation, even leading the G20 to introduce regulations for crypto exchanges and investors.
South Korean regulators are now also beginning to acknowledge cryptocurrency exchanges as licensed and regulated financial institutions, making the Asian market increasingly more important in the space.
In the US, the role of the SEC is to protect investors from potential fallout – the CBOE’s insurance will protect investors from these worst-case scenarios, and along with the high status of the CBOE this may lead to a successful application.
— Alistair Milne (@alistairmilne) July 18, 2018
What does a Bitcoin ETF do exactly?
An ETF is defined as a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
Bitcoin ETFs will make it far, far easier to buy Bitcoin in a space that is currently rather convoluted. Many investors are interested in cryptocurrencies but would never register an account with Coinbase or try to get their head around digital wallets with encrypted keys, etc.
Public market investors are, however, familiar with ETFs, and if successful the filing will make it as easy for them as logging into their fidelity account and hitting the buy button without needing to trust familiarize themselves with exchange-specific interfaces like Binance and Coinbase. Given the high number of exchange hacks and exit scams that have hit the market over the years, a great many investors will simply never consider trusting one with their funds – but now they won’t have to.
The official document filed by CBOE with the SEC stated that the CBOE will only invest in bitcoin on behalf of investors. This boils down to the Cboe facilitating over-the-counter (OTC) trades via accredited investors in the traditional finance market, while insuring funds in bitcoin acquired by investors.
The document read:
“According to the Registration Statement, the Trust will invest in bitcoin only. The activities of the Trust are limited to: issuing Baskets in exchange for the cash and/or bitcoin deposited with the Cash Custodian or Trust, respectively, as consideration; purchasing bitcoin from various exchanges and in OTC transactions; delivering cash and/or bitcoin in exchange for Baskets surrendered for redemption; maintaining insurance coverage for the bitcoin held by the Trust; and securing the bitcoin held by the Trust.”
CBOE Application: Asian markets and Insurance are pivotal
The SEC rejected previous applications specifically because the crypto sector is not regulated overseas, meaning it is impossible for them to influence regulatory compliance outside of their jurisdiction. Now that Japan and S. Korea are planning to fully regulate the crypto exchange markets the future is looking very bright for the timely EFT application.
The official CBOE Bitcoin ETF filing application document categorically states that insurance will be provided to investors.
“In addition to its security system, the Trust will maintain comprehensive insurance coverage underwritten by various insurance carriers. The purpose of the insurance is to protect investors against loss or theft of the Trust’s bitcoin. The insurance will cover loss of bitcoin by, among other things, theft, destruction, bitcoin in transit, computer fraud and other loss of the private keys that are necessary to access the bitcoin held by the Trust,” the Cboe filing read.
The document goes on to state the specific levels of insurance provided:
“The insurance policy will carry initial limits of $25 million in primary coverage and $100 million in excess coverage, with the ability to increase coverage depending on the value of the bitcoin held by the Trust. To the extent the value of the Trust’s bitcoin holdings exceeds the total $125,000,000 of insurance coverage, the Sponsor has made arrangements for additional insurance coverage with the goal of maintaining insurance coverage at a one-to-one ratio with the Trust’s bitcoin holdings valued in U.S. dollars such that for every dollar of bitcoin held by the Trust there is an equal amount of insurance coverage.”
These figures show what kind of difference we may be about to see in the size of investments and the level of investment that may be about to enter the market. A successful filing would be great for adoption, allowing a flood of institutional investors and allowing people to inject easily some Bitcoin in their 401k as a speculative asset.
When will we know?
The market could be on the brink of something major – so keep an eye out for news of the application!
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