Elad Roisman, the newest commissioner at the Securities and Exchanges Commission (SEC), has met with representatives from SolidX, VanEck, and CBOE which have a pending application for a bitcoin ETF aimed at accredited investors with one share being 25 btc, currently worth $160,000.
The presentation they gave has now been made public. They argue the bitcoin market has now matured as regulated bitcoin futures continue to increase in volumes.
They say Over the Counter (OTC) desks are overseen by the Commodities Futures Trading Commission (CFTC). With the fund applicant further claiming they have information sharing agreements with US-based bitcoin spot markets.
The bitcoins would be insured, they say, and the ETF would protect investors more than their current sole option of buying crypto directly, which means they have to store it or handle counterparty risks.
They argue the application meets all the requirements, and then for some reason take a jab at ICOs in an otherwise decent presentation.
Chances of an approval, however, appear slim going by some recent comments made by the now departing Kara Stein, one of the two Democratic SEC commissioners out of five in total.
In an interview with Bloomberg dominated by crypto discussions and specifically the bitcoin ETF, Stein said:
“They’re going to have to show how they can get accurate valuations… despite sometimes volatile price swings. How they can make sure there’s physical custody when necessary? How they’re going to make sure there’s adequate liquidity, especially in a 40 act fund context so investors can get their money.
We’ll look at all those factors and make a decision on that particular fund and how it’s actually going to be able to handle those particular requirements.”
It is difficult to discern what exactly she means by “accurate valuations.” The price of anything depends on supply and demand. Bitcoin’s supply is fixed, while demand isn’t easily predictable.
No one can be sure, for example, whether the sale of new smart phones will continue to increase or will hit saturation, by how much say laptop sales will increase or decrease and so on.
Past sales may be some sort of indicator, but they’re not necessarily predictive of future sales. The price to earning (P/E) valuation, therefore, is more based on past performance.
Which is why plenty of companies have very low P/E, yet still no one buys them. While some have high P/E and yet they keep going up.
The market in those cases thinks either past performance was strong but future performance will be weak, or vice versa.
As one is trying to predict the future, there necessarily can’t be such a thing as “accurate valuation.” But if by that she means somewhat pointless numbers like P/E, then cryptos have plenty of indicators.
The number of transactions is one of them, indicating growing usage and thus growing demand. The number of new addresses, the amount moved, the amount paid in fees and so on.
Unlike in stocks where investors have to wait every quarter with insiders having plenty of opportunities to buy or sell before the crowd, blockchain tech provides all these valuation indicators pretty much instantly and very much continuously.
It further does so publicly, revealing it to all in the open at the same time. Making valuation somewhat easier as blockchain tech provides far more information and unforgeable information that accountants can’t cook through the many tricks they use in stocks.
If she means more technical aspects like keeping the ETF price pegged to the bitcoin spot price, then arbitragers will be happy to do that job for free as they do in other ETFs with the high crypto price volatility being a plus in this case as it attracts more arbitragers and more sophisticated ones.
Her other points also seem to suggest she perhaps isn’t quite familiar with bitcoin or blockchain tech. She obviously has heard the words and may vaguely know what they are, but we’d be surprised if she’s ever looked at a blockchain explorer or has undertaken a crypto transaction.
The current SEC Chairman, Jay Clayton, said during a Senate hearing that SEC has no tech expertise, no coders to advise them. They see that as irrelevant and they see cryptos as just a stock when they have some similarities, but they have vast differences too.
Like, Stein says: “how they can make sure there’s physical custody when necessary?” By, you know, holding the private key. Or: “how they’re going to make sure there’s adequate liquidity?” What does that even mean? Liquidity as in people want to buy it, or as in trading volumes?
Regarding the latter, cryptos are handling 100x or more trading volumes than stocks. Something the commissioner also probably doesn’t know, but we’re sure she knows Berkshire Hathaway’s stock price is determined on just 30 buying and selling trades a day.
With such high level of ignorance, therefore, chances of a crypto ETF approval remain slim in the current composition. Stein will however leave in December as her term has now expired. There is yet no replacement, so it will fall to three men and one woman to decide whether to approve a crypto ETF or not.
Hester Peirce and Roisman will probably vote in favor of approving the ETF. Democrat Robert Jackson has voted no and will probably continue to do so. While Clayton’s wife works at Goldman Sachs so the former bankers legal advisor will probably keep saying no.
That means it may all be down to whoever Trump now picks to be the fifth SEC commissioner, unless Jackson or Clayton can be persuaded to open the door.