The cryptocurrency community is divided on whether a Bitcoin exchange-traded fund (ETF) will be approved within 2019. Bitwise, as crypto hedge fund, believes the crypto trading ecosystem has evolved to a point in which an ETF could emerge.
John Hyland, the global head of ETF at Bitwise, said that the firm is optimistic about the approval of a Bitcoin ETF by the year’s end, noting “we are optimistic that 2019 should be the year that a bitcoin ETF launches.”
What’s Behind the Positivity Toward Bitcoin ETFs?
Following the rejection of ten Bitcoin ETFs in 2018, the U.S. Securities and Exchange Commission (SEC) outlined various reasons to justify their decision to deny the launch of a Bitcoin ETF.
Three major reasons the SEC cited in the last two quarters of last year were:
- Lack of surveillance systems to monitor transactions
- Vulnerability to manipulation
- Lack of regulation in overseas markets
Throughout the past six months, major cryptocurrency exchanges, some voluntarily, have implemented strict Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations to prevent anonymous accounts and the settlement of suspicious transactions.
Binance, for instance, brought in a blockchain analytics firm Chainalysis to prevent transactions tied to money laundering and fraudulent operations from being sent to the exchange.
With the lead of Japan and South Korea, many leading markets have implemented comprehensive regulatory frameworks surrounding cryptocurrency exchanges. Some have imposed national licensing programs and others have implemented policies such as the prohibition of anonymous accounts and foreigners from trading in local markets to eliminate manipulation.
In a statement, Matt Hougan, the global head of research at Bitwise, said that apart from significant improvements to the three main issues the SEC laid out in the past, the infrastructure handling cryptocurrency custody has strengthened and the volume of the over-the-counter (OTC) market, which is more strictly and transparently regulated compared to exchanges, has increased.
“The SEC has asked thoughtful and relevant questions about the quality of the crypto trading ecosystem, the reliability of crypto pricing, the strength of the arbitrage function in crypto and the robustness of crypto custody. We have spent the past year researching these questions and look forward to discussing those findings with the SEC staff in connection with the filing and listing application.”
As SEC commissioner Hester Peirce previously said, the approval of the first Bitcoin ETF could take days or years and the time frame of it is uncertain. But, companies in the cryptocurrency space are taking baby steps to satisfy each of the requirements set forth by the SEC.
Several external variables also exist including the potential approval of an ETF in major overseas markets like Japan.
Jake Chervinsky, a government enforcement defense and securities litigation attorney at Kobre & Kim, said that the approval of a Bitcoin ETF in Japan will not have a meaningful impact on the decision of the SEC but it could solve the manipulation issue cited by the SEC.
“The SEC rarely defers to regulators in other countries. The sentiment is: ‘we’re leaders, not followers.’ But, a regulated ETF with volume does help solve the manipulation problem,” he said.
New ETFs, New Answers
The newly filed ETF proposal of Bitwise uses an index that tracks spot prices from exchanges and physically-settled futures contracts, which none of the previously filed ETFs have done.
The VanEck Bitcoin ETF filing tracks the OTC market of Bitcoin that is generally believed to be at least twice as big as the exchange market.
Even if new ETF filings are rejected by the SEC, they present new challenges to the commission that could help companies to develop ETF proposals that eventually meet all of the demand of the SEC in a variety of areas.