The Securities and Exchange Commission (SEC) kicked off a debate about introducing Bitcoin ETF this week by publishing a letter warning mutual funds that “Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative market.” The agency has about ten applications under review for a Bitcoin ETF. For several, its comments were a sign that it was still not convinced about the cryptocurrency’s price stability – a key concern it had raised in a 2018 missive outlining problems with a Bitcoin ETF.
In its latest release, the agency also mentioned several points testifying to the evolution of the Bitcoin futures market. “[The] Bitcoin futures market has developed since then (2018), with increased trading volumes and open-interest positions. In addition, the Bitcoin futures market consistently has produced a reportable price for Bitcoin futures. The Bitcoin futures market also has not presented the custody challenges associated with some cryptocurrency-based investing because the futures are cash-settled,” it stated.
Several funds, from Blackrock to Morgan Stanley, have taken positions in Bitcoin futures in the last year. Others, like Guggenheim Partners, have reserved the right to invest in cryptocurrency funds like the Grayscale Bitcoin Trust. Along with other institutional investors, these firms have bolstered liquidity of the Bitcoin futures market. A liquid market is a stable market and asset price discovery, through the balancing process of supply and demand, becomes easier in such a market.
In the last two years, many investment firms submitted applications to launch a Bitcoin ETF. They based the price of the underlying asset on its price in the then recently-launched Bitcoin futures markets at the Chicago Mercantile Exchange (CME) and the Cboe. The SEC rejected the applications stating that there was no proof that the futures markets were not susceptible to manipulation or that they “were of significant size.”
In light of its previous statements, the agency’s latest release is a positive development. But it also inserted a caveat to its pronouncements about the Bitcoin futures market. The SEC said closed end funds, or those funds that do not provide daily redemption capabilities, are at less risk as compared to open ended funds, which must disclose the risks involved in Bitcoin investing. (ETFs are open-ended funds because investors are allowed to redeem their shares on a daily basis).
Meanwhile, the agency will monitor the effect that mutual fund investment will have on multiple aspects of the Bitcoin futures market, including investor protection, capital formation, and efficiency. “The staff welcomes further input from ETFs and other market participants, particularly input that focuses on efforts to ensure compliance with the Investment Company Act and its rules and promote investor protection,” it stated.