Crypto-Cop Conundrum > Bitcoin ETF Postponed
SEC File No. SR-CboeBZX-2018-040
CboeBZX Inc Exchange Request to the SEC for trading of VanEck SolidX Bitcoin Shares
December 6, 2018 – Read below to review the prior regulatory history. On September 20, 2018, the Commission instituted proceedings to approve or disapprove the proposal. In the interim, the Commission stated that 1,600 comments have been received. Wow! Was this the crypto version of a ‘literal stampede’, or a ‘troll tide’, or was there a sale on copy paper? We would have sent in a comment but our mimeograph machine was broken. In any event, the Commission has now decided to postpone any decision for the complete 240 day period to February 27, 2019, pursuant to its authority under Section 19(b)(2) of the Securities Exchange Act (15 U.S.C. 78s(b)(2)).
Hot Potato Punt
Punting this hot potato into the future should come as no surprise to SEC crypto watchers. Chairman Jay Clayton appeared November 27, 2018, at the Coindesk® Consensus: Invest Conference and raised the concerns that ETF approvals should not pass until concerns over token custody and market manipulation, to name two, are addressed. He was speaking informally and no transcript or extract of the live conversation with moderator, Glenn Hutchins, has been located on the SEC website, which would normally be found on the Chairman’s Bio page. Informal remarks or not, the Chairman continued in the analytical securities vain vis-a-vis crypto articulated in the SEC July 25, 2017, DAO report. We believe the SEC remains on message that investors are to be protected and crypto is not exempt.
Crypto-Cop Conumdrum
In reality, we do not see a viable industry solution to these unresolved crypto-cop conundrums. There appears to be no solution currently in situ to earn the SEC stamp of approval for the VanEck-SolidX proposal in the remaining two and half months. That is as glaring as a flashing red STOP sign for cypto-traffikers, and carefully watched by the SEC crypto-cops.
Congress and the Crypto-Swamp
Coincidentally, on the same day two Congressmen introduced bipartisan bills to direct regulators to draft just such a cryptocurrency framework. So, instead of industry or an SRO trying to divine a scheme that may hit or miss regulatory approval, the bills appear to direct the responsible commissions to articulate such a proposal. It remains to be seen if Congress is just trying to anoint crypto as a special class semi-exempt from the current securities laws, or to make the current crypto-swamp safe for a family swim. We suggest a shark cage – just in case. Stay tuned.
Prior VanEck-SolidX ETF History:
October 9, 2018 – On October 9, 2018, Commissioner Roisman and counsels Dean Conway, Matthew Estabrook, and Christina Thomas met with representatives from SolidX, VanEck, and CBOE. The parties discussed the application to list an exchange-traded fund that was currently pending with the Commission (File No. SR-CboeBZX-2018-040). The memo included an 11 page presentation provided to the Commissioner and his counsels.
September 20, 2018 – The Commission instituted proceedings under Section 19(b)(2)(B) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. 78s(b)(2)(B), to determine whether to approve or disapprove the proposed rule change. See SEC Release No. 34-84231 (Sept. 20, 20186), 83 FR 48665 (Sept. 26, 2018) (“Order Instituting Proceedings”).
Pursuant to Section 19(b)(2)(B) of the Act, the Commission provided notice of the grounds for disapproval under consideration, and asked commenters to address the sufficiency of the Exchange’s statements in support of the proposal. Then the Commission listed a detailed series of 18 questions to commenters.
Submissions were to be submitted by 21 days from date of publication in the Federal Register and Rebuttal comments to be submitted by 35 days from date of publication.
August 7, 2018 – the Commission designated a longer period within which to act on the proposed rule change. The Commission found that it was appropriate to provide a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change. The Commission extending the 45-day time period. The Commission designated September 30, 2018, as the date by which the Commission would either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change (File No. SR-CboeBZX-2018-040). See SEC Release No. 83792 (August 7, 2018), 83 FR 40112 (August 13, 2018).
June 26, 2018 – The Exchange filed the proposed rule change on June 20, 2018, and the SEC filed the notice on June 26, 2018. It appeared in the Federal Register on July 2, 2018. See SEC Release No. 34-83520, 83 FR 31014 (July 2, 2018).
The Exchange proposed to list and trade shares of SolidX Bitcoin Shares (the “Fund”) issued by the VanEck SolidX Bitcoin Trust (the “Trust”), under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares.
SolidX Management LLC was the sponsor of the Trust (“Sponsor”). The Trust would be responsible for custody of the Trust’s bitcoin. SolidX Management LLC was a wholly-owned subsidiary of SolidX Partners Inc. Delaware Trust Company is the trustee (“Trustee”). Foreside Fund Services, LLC would be the marketing agent (“Marketing Agent”) in connection with the creation and redemption of “Baskets” of Shares. Van Eck Securities Corporation (“VanEck”) would provide assistance in the marketing of the Shares.
The Trust would invest in bitcoin only. The Trust’s assets would consist of bitcoin held by the Trust utilizing a secure process described as, “bitcoin Security and Storage for the Trust”. The Trust may hold a limited amount of cash in connection with the creation and redemption of Baskets and to pay Trust expenses.
The activities of the Trust would be 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;
- selling bitcoin or transferring bitcoin as necessary to cover the Sponsor’s Management Fee, bitcoin Insurance Fee, Trust principals’ and employees’ salaries, expenses associated with securing the Trust’s bitcoin and Trust expenses not assumed by the Sponsor and other liabilities;
- selling bitcoin as necessary in connection with redemptions;
- 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.
The Trust would use available offering proceeds to purchase bitcoin primarily in the OTC markets, without being leveraged or exceeding relevant position limits. The investment objective of the Trust was for the Shares to reflect the performance of the price of bitcoin, less the expenses of the Trust’s operations. The Trust intended to achieve this objective by investing substantially all of its assets in bitcoin traded primarily in the over-the-counter (“OTC”) markets, though the Trust could also invest in bitcoin traded on domestic and international bitcoin exchanges at the Trust’s discretion.
The Trust expects to trade on one or more of the following U.S. dollar-denominated bitcoin exchanges: Bitstamp (located in Slovenia and with an office in the U.K.), GDAX (f/k/a Coinbase) (located in California), Gemini (located in New York), itBit (located in New York), bitFlyer (located in New York) and Kraken (located in San Francisco). The Trust states that all of these exchanges follow AML and KYC regulatory requirements.
The review of Bitcoin and the marketplace in the Release was extensive and recommended to the reader.
Commentary by Attorney Timothy F. Mills, Editor / Action Cyber Times™ © 2018 All Rights Reserved.
Action Cyber Times™ provides resources for cybersecurity, data privacy, compliance, breach reporting and risk management, intellectual property theft, and the utilization of emerging technologies such as artificial intelligence, machine learning, blockchain DLT, advances in cryptographic applications, and more.
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