7 ms·

SEC rejects Grayscale Bitcoin ETF application [pdf]

165 points by cwwc 4y ago

social_quotient 4y ago
Yet the short interest etf was approved last week https://www.bloomberg.com/news/articles/2022-06-21/wall-street-gets-a-short-bitcoin-fund-after-70-crypto-collapse https://www.bloomberg.com/news/articles/2022-06-21/wall-stre... I feel like I’m missing something.
- woodruffw 4y ago
  Page 2 and forwards offers the SEC's rationale: they don't believe that Grayscale can meet the requirements of the Exchange Act. Presumably the other ETF was able to do so.
- steveBK123 4y ago
  Could just be Proshares has their act together whereas Grayscale does not. Note Proshares also a long-bitcoin ETF. Both the long & short Proshares are futures based, and do not hold bitcoin. Grayscale it looks like was trying to launch a product directly linked to spot bitcoin, holding them in some sort of trust? Maybe SEC had concerns about custody.. Also, Proshares has historically been a big player in the ETF space, whereas Grayscale has.. as far as I can tell, a single ETF with ~$7M in assets.
  - social_quotient 4y ago
    I get it but why allow for exotic derivatives and not the spot? It seems like you’d disallow derivative products until the spot was properly handled. (Custody concerns etc).
    - mattficke 4y ago
      Bitcoin futures are cash settled so there aren’t the same custody issues, there’s no delivery of the underlying involved.
      - social_quotient 4y ago
        Is the future not likely to be impacted the same way if the asset if manipulated? Several of the other comments on this thread mention that the future appears to be less likely to be manipulated. Intuitively I’d think they are wildly similar, or correlated, but I’m sure I don’t know enough here to understand why I’m wrong.
        Galanwe 4y ago
        > Intuitively I’d think they are wildly similar, or correlated The thing is that if you are willing to bet on the price movement of a token, futures are a much more cost and capital efficient way to do so. - Its more capital efficient because you can leverage futures. Say you want an exposure of $1000 on the price of BTC and only have access to a spot market. You would need to actually buy $1000 worth of BTC, or use margin (a loan basically, but the interests are prohibitive). With futures, you would just need to maintain the required margin amount depending on your preferred leverage, so you could get that $1000 BTC exposure with a post of $100. For the same exposure of $1000, futures allows you to use less capital, or conversely with the same capital, you can have more exposure with futures. - Trading fees are much lower on futures, since this is mainly a virtual, exchange-owned instrument. There is often no actual movement of the underlying when trading futures, especially if everything is settled in cash. Futures trading fees are often significantly lower than spot. These advantages of futures often lead them to have _much_ more liquidity than the actual spot market, which in turn means they are much more stable. What we see often on small marketcap coins is that the ownership of tokens is opaque. Regularly, some whales (sometimes even unknowingly) dump huge amounts of the coin on the spot market, which leads to flash crashes until market makers can provide back some liquidity. This is very unlikely to happen on futures, since the liquidity is so much higher, dumping some millions worth in the market wouldn't dry out the book all that dramatically. I did not check numbers recently, but just to give you a rough idea, the daily traded amount on uniswap (spot, decentralized) should be around $1B/day, Binance spot should be around $10B/day, and Binance perpetual futures around $40B/day.
    - Galanwe 4y ago
      A future is not an "exotic" derivative, it's a "vanilla" product. Futures are mainly OK because there is no custody nor settlement of the underlying itself. Everything is settled in cash. In this respect, cash settled (inverse) crypto futures could almost be considered as having no link whatshowever with crypto currencies. This fine point is actually what allowed brokers to propose crypto futures ahead of any regulation.
      - steveBK123 4y ago
        Exactly, futures are essentially the most vanilla and ancient derivative product in the world. Hammurabi's Code references them as does Aristotle. The earliest uses have been primarily agricultural, allowing farmers to sell grain in advance for cash now and use that cash to fund operations in order to grow the grain.
    - steveBK123 4y ago
      Bitcoin futures trade on the CME, a well known and well regulated US-based exchange. They are cash settled so no bitcoin custody issues. The spot index price source the futures trade in reference to is a well documented methodology sourcing from multiple bitcoin exchange sources. https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cryptocurrency-benchmarks.html?redirect=/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cry... https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cryptocurrency-benchmarks.html?redirect=/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cry... By comparison, with Grayscale, who knows how custody works and what exchange exposure they may have.
    - quickthrowman 4y ago
      Exchange traded futures are not exotic derivatives, you can trade /BTC on a phone app with ~$30-50,000 of margin, depending on your broker. CME Bitcoin futures are cash settled, it doesn’t settle in actual BTC.
  - thesausageking 4y ago
    Grayscale doesn't have many ETFs because the SEC refuses to approve crypto ETFs. Their Bitcoin trust (GBTC) has $13B under management, is carried by every major brokerage, and they've run it since 2013. They have the exact right expertise to run a Bitcoin ETF.
    - lalaland1125 4y ago
      The SEC refuses to approve spot crypto ETFs. The SEC approves future based crypto ETFs. Also, I wouldn't point to grayscale as an example of a good operator. Their Bitcoin trust is trading way below par.
      - gjs278 4y ago
- ProjectArcturis 4y ago
  There are several long BTC ETFs, they just only hold positions via the futures exchange. That's what the short ETF does as well, just with negative positions. Grayscale was applying to be a "physical" ETF, which would hold and buy and sell actual coins.
- chollida1 4y ago
  Non spot vs spot etf Th sec is fine with a futures based etf but for some reason doesn’t want a Spot etf. Which is strange because Canada has multiple spot etfs. Some arguments for not allowing a spot wtf is that the futures markets are regulated and smaller currently so a futures based wtf can’t grow as big as a spot one at the moment. Those aren’t great reasons because a lot of spot markets are now hosted by regulated companies like coin and gemini and the he sec said that futures based etfs can hold some of the Canadian spot etfs f they can’t get enough futures contracts Greyscale wins here by losing as it means they continue to get 2% a year in assets where as a spot etf would charge under 1%. The Discount to NAV trade continues on, with a 30% discount waiting to be unlocked. Funny story about this fund and its NAV. It helped sink the fund 3AC. In 2019 and 2020 it was a very crowded trade to give them BTC and get units back that were locked up for 6 months. The units at the time traded at a premium to its NAV( ie you gave 1,000,000 in BTC and got back units worth 1,200,000). Now the NAV has inverted such that the cost per share is less than the btc it holds due to funds like 3AC trying to get their money out. Lots of funds have lost alot of money trading this fund around, and if it was allowed to convert to an ETF none of those losses would have happened, and yet the SEC wont' allow them to convert for some reason :(
  - Tesl 4y ago
    The SEC has no responsibility to save them from their own dumb trades
  - tim333 4y ago
    Ah - guess that's the Grayscale Bitcoin Trust. I'm a bit slow keeping up with all the ETFs and stuff. Here's a nice graph of its premium/discount https://www.theblock.co/data/crypto-markets/structured-products/premium-of-gbtc https://www.theblock.co/data/crypto-markets/structured-produ... Interesting it was at a 100% premium to assets not so long ago
ProjectArcturis 4y ago
Poor Grayscale. It's going to be compelled to continue holding $43B in crypto and charging investors 2% a year.
etaioinshrdlu 4y ago
I find the document somewhat shockingly long. Almost like it is designed to confuse and create roadblocks. Can someone summarize what it means?
- woodruffw 4y ago
  It's a legal document. A lot of the length here is citations for prior rulings (take a look at Pages 3 and 4, for example). It's not "designed to confuse," but it also isn't intended to be light reading. The TL;DR is that the SEC does not believe that the Grayscale ETF can meet the requirements stipulated for an "Exchange-Traded Product" under the Exchange Act. In particular, the SEC found that a proposed rule change that would have allowed for the ETF violated the requirements of the Act under Section 6(b)(5). All of this is covered on Page 2. Subsequent pages cover precedent, various conditions under which other ETFs have been approved ("surveillance-sharing agreements"), and an extended justification for rejecting the proposed rule change.
- dpierce9 4y ago
  This is a thorough explanation of their reasoning with pointers to relevant laws and rules. Their position is that the law doesn’t allow them to approve this and they say which laws and why. What else do you want? A 140 character limit? Would you have preferred a stamp that say ‘Denied’ with no explanation? Congress requires agencies to explain themselves. This is a good thing and a sign that decisions aren’t arbitrary and that things are working.
mgamache 4y ago
Well they are suing [Will Argue SEC Violated Administrative Procedure Act and Securities Exchange Act of 1934] https://www.globenewswire.com/news-release/2022/06/30/2471737/0/en/Grayscale-Investments-Initiates-Lawsuit-Against-the-SEC.html https://www.globenewswire.com/news-release/2022/06/30/247173...
- woodruffw 4y ago
  Here is the crux of their argument (informally, I'd be interesting to see how they actually frame it in the suit): > As Grayscale and the team at Davis Polk & Wardwell have outlined, the SEC is failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934,” added Donald B. Verrilli, Jr., Grayscale Senior Legal Strategist and former U.S. Solicitor General. “There is a compelling, common-sense argument here, and we look forward to resolving this matter productively and expeditiously." Given that the SEC has approved no other spot ETFs for BTC, I don't know how they can make the argument that the SEC has "failed to apply consistent treatment." Unless they're claiming that spot ETFs for BTC as a whole should be treated identically to other spot ETFs, which feels inconsistent with their larger argument for approval (that the Bitcoin market needs to be brought into the regulatory fold, implying that it's currently amenable to manipulation.)
  - toolz 4y ago
    You can buy ETFs for all sorts of commodities, currencies and securities. No matter which umbrella bitcoin falls under, there are numerous etfs that can be be compared, right? Why is bitcoin or crypto special here? Is it the SECs job to make judgements on the assets that want to be included in the exchange?
    - woodruffw 4y ago
      > Is it the SECs job to make judgements on the assets that want to be included in the exchange? Yes, and that is the crux of the argument: the Exchange Act requires the SEC to evaluate ETPs for the possibility of "fraudulent and manipulative acts and practices." In other words: the SEC lacks confidence that approving a spot ETF for Bitcoin would not further advance manipulation and/or fraudulent behavior in the Bitcoin market.
kolbe 4y ago
This really sucks for Grayscale holders. As of the close today, $GBTC owners have the rights to $18.62 of Bitcoin per share and the market is pricing it at $13.32. And there is no way to redeem the shares for Bitcoin. By converting to an ETF, this would have become possible. But now, the $12.9b of assets Grayscale holds will be locked up in perpetuity while its investors watch the fees get eaten up.
- futevolei 4y ago
  A friend who does business with them said if the sec denied them they would file suit (check). If that doesn’t work they will open up a window to let holders convert at nav a portion of their holdings. For the remaining they are considering lowering their fees.
- s1artibartfast 4y ago
  Can shareholders or private equity liquidate the company? Seems like a lot of money to be made?
  - wmf 4y ago
    I wonder if the slippage of liquidating $13B worth of Bitcoin is already priced in. In other words, if GBTC was liquidated maybe shareholders would only get $13 per share so the current market price is fair.
- rkagerer 4y ago
  Certainly sucks, but it's not unexpected there's a price differential. GBTC was never equivalent to real Bitcoin. I can understand some investors speculating they'd get the option to convert, but that exit always had risk attached (in terms of how long it would take and whether it ever happens).
- paulgb 4y ago
  As Morningstar has pointed out, Grayscale has the right to fix this themselves, but they choose not to. They allude to the fact that Grayscale takes a generous fee from the managed capital being a possible reason they don’t. > Grayscale has the power to flip this dynamic. Issuers of closed-end funds can redeem shares at the NAV; this allows investors to sell their shares back to the trust, which would close the discount. Using the example above, investors could exchange their $0.85 trust shares in for the $1.00 of Bitcoin it represents. […] > Yet the redemption option might be unpalatable for Grayscale. It would result in lower assets under management, as Grayscale would need to deliver Bitcoin to investors trading in its shares. The firm charges a whopping 2.00% management fee on trust shares (another factor that drives differences between the share price and the underlying Bitcoin), which it may be reluctant to give up with a smaller asset base. https://www.morningstar.com/articles/1068472/the-problems-with-the-worlds-biggest-bitcoin-fund https://www.morningstar.com/articles/1068472/the-problems-wi...
jonathan-adly 4y ago
The market thinks that the SEC is putting up road blocks to get the exchanges to register with them (currently, the only license needed to operate a US-based exchange is a money-transmitter license). The exchanges don’t want to register with the SEC, because according to them - they aren’t selling securities. Thus - the game of spot ETF. Grayscale isn’t rushing either, because they are farming management fees. Only ones losing is “investors”. The ones that the SEC suppose to protect.
- woodruffw 4y ago
  Really? You can't think of any significant investor risk that the SEC might have identified here? The SEC's response here is actually very even handed: they agree that there are advantages to a spot ETF for Bitcoin on a regulated exchange. The ruling observes that the presence of advantages is not sufficient: there must be proof that the rule change would not enable "fraudulent and manipulative acts and practices." They've also laid out how that proof might be obtained in the future: through a "surveillance-sharing agreement" that ensures transparency concerning the underlying assets.
  - toolz 4y ago
    and which other spot ETFs are held to this standard? Proving a negative isn't something I'm aware of other ETFs being made to do.
    - woodruffw 4y ago
      To the best of my knowledge, all of them. This is law, not an undergraduate philosophy of logic class. "Proof" in these contexts means providing supporting or contradictory evidence; the SEC is stating that a company that wishes to offer a spot Bitcoin ETF must provide sufficient evidence that contradicts the other evidence that Bitcoin's market is susceptible to fraud and manipulation. Edit: The SEC lays out some of this evidence on pages 22ff.
      - yieldcrv 4y ago
Galanwe 4y ago
This is a spot versus future ETF issue. When applying for an ETF you have to prove that the underlying cannot be easily manipulated, and is evolving in a fair market. The current ETFs are based on BTC futures from CME, which is a high quality, regulated, futures exchange. The SEC is basically saying that the spot BTC market cannot be trusted, is not regulated enough, subject to potential manipulation (as defined by Grayscale of what is BTC spot market). There are points to be made for the SEC's arguments, depending on what Grayscale defines as being "BTC spot". I did not read their application but I can guess they would have to prove the spot market reference price (the ETF index) is a somewhat aggregated value based on multiple markets avg(binance, uniswap, sushiswap, coin base, ...) and failed to convince it could be trusted. Considering most of these markets are beyond SEC's reach, it sort of makes sense. There are also arguments in favor of Grayscale, mainly because the future price is based on the spot price, so a manipulation on the latter would reflect on the former.
- nu11ptr 4y ago
  > There are also arguments in favor of Grayscale, mainly because the future price is based on the spot price, so a manipulation on the latter would reflect on the former To me this is everything. If you can't trust spot, then you can't trust futures because futures price will immediately start moving towards the manipulated spot price. Therefore, in my opinion, this is just a game the SEC is playing for whatever reasons.
  - smabie 4y ago
    crypto futures price often leads spot, not the other way around. However CME crypto futs don't really lead anything.
    - nu11ptr 4y ago
      I would agree in most cases that is the way it plays out, but then there is no issue either since SEC trusts futures. In the case of direct spot manipulation, spot would in that case lead futures which would no doubt follow suit to whatever price spot had. Regardless, I'm sure there is much arbitrage between them, so saying one is trustworthy and the other is not, is silly in my opinion. Iow, if there is a problem with one then neither should be allowed, not one or the other.
jcranmer 4y ago
Here is the tl;dr of why it was rejected, from a brief skimming: The spot bitcoin price used to compute the ETF is based on unregulated exchanges in a sector that is concentrated, and rife with fraud and market manipulation (which the entity applying for the ETF does not deny!). The guard rails to make sure that the ETF is insulated from fraud and market manipulation are... not really there. Basically "we believe the exchanges we use to compute Bitcoin price information are free from fraud and market manipulation."
- yieldcrv 4y ago
  Not the SEC’s job. It is an application of multiple acts that never envisioned ETFs wrapped around commodities. No person in Congress ever said “hey you know how you don't judge the merit of investments, by design, well we want to add in subsection 8) to make an exception to that for ETFs full of spot commodities”
steveBK123 4y ago
(edit) I find it unfortunate how far we have come from people being mad at SEC for not catching a lot of the 2008 era frauds. Now we have people mad that SEC won't rubber stamp a spot bitcoin ETF to allow more dumb money to enter the crypto space as exit liquidity with fewer clicks. We should be happy the SEC is taking a serious look in advance in order to do some prevention, rather than closing the doors after the horse has bolted which is the usual course of action..
- dang 4y ago
  Please don't post in the flamewar style about classic flamewar topics. It leads to flamewars, which we're hoping to avoid here because they're so nasty and so repetitive. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html (Your other comments in this thread seem vastly better and much more in keeping with the intended spirit of the site.)
  - steveBK123 4y ago
    fair, edited
    - dang 4y ago
      Appreciated!
- LatteLazy 4y ago
  The SECs job isn't to stop people making mistakes or bad decisions. It's meant to stop people being treated unfairly and to ensure orderly markets. If people want to throw money at ShitCoin, that's their right. The SEC just needs to make sure it's clear what they're buying and the market for the ETF works as expected...
  - JumpCrisscross 4y ago
    > SEC just needs to make sure it's clear what they're buying and the market for the ETF works as expected Which APs can’t do if the spot price is untrustworthy.
paulpauper 4y ago
Not a fan of BTC but I think it's time to approve this How would a bitcoin ETF be riskier than stuff which already exists like UVXY, which has lost 99.9999% of it value since inception and has even more volatility
- runeks 4y ago
  It’s not about risk or volatility. It’s about the SEC thinking there are no trustworthy sources of the BTC spot price.
  - Galanwe 4y ago
    I feel like this comment actually sums up perfectly the whole discussion on this post.
- ac29 4y ago
  > How would a bitcoin ETF be riskier than stuff which already exists like UVXY, which has lost 99.9999% of it value since inception UVXY is one of those things only meant to be held a short time (1 trading day or less). Historical pricing isnt really meaningful (its shown as being priced over $1B per share at inception on several sites, which is wrong).
erung88 4y ago
It's SEC playground so they can reject whatever what they want. For those who truly believe in cryptos, they will invest in cryptos directly bypassing the traditional financial system.
TedShiller 4y ago
maybe they'll approve ApeCoin ETF though
ufo 4y ago
Does anyone know where I can find a TL;DR of the whole Grayscale bitcoin trust thing? I have heard some people say that they wanted to become an ETF because the trust doesn't allow them to sell the bitcoin, only hold it. Is that true? I really don't understand what's happening.
api 4y ago
Good decision. After the big "fortune favors the bold!" ad blitz of last year the pot of greater fools willing to pour money into cryptocurrency (without understanding it) is probably pretty tapped out. At this point the only way to keep the music going is to find a way to tap and drain pension funds, endowments, IRAs, and other sources of more conservative money that reside in public markets. Keep that from happening and the Ponzi collapses unless they can find some other source. The only other one I can think of is flight capital from China and Russia. That's always been a factor in propping up crypto but the thing is they're not HODLers. They don't care about propping up crypto, just using it to get money out of places with capital controls. Once the money is out they're likely to liquidate on the other side. Wire transfer is one of the few areas of actual utility in cryptocurrency but it doesn't really prop up the Ponzi. The same applies to money laundering. They're using crypto as a vehicle to launder money but once laundered they want the money back in generally usable form. They're not HODLing.
upupandup 4y ago
Definition of insanity is attempting the same thing over and over and expecting a different result. This is what Bitcoin spot ETF proponents will just not admit. There's zero chance spot prices of bitcoin which have been irrefutably proven to be prone to manipulation. They are desperate to pump Bitcoin prices its frankly comical.

165 points by cwwc 4y ago

Yet the short interest etf was approved last week https://www.bloomberg.com/news/articles/2022-06-21/wall-street-gets-a-short-bitcoin-fund-after-70-crypto-collapse https://www.bloomberg.com/news/articles/2022-06-21/wall-stre... I feel like I’m missing something.

woodruffw 4y ago
Page 2 and forwards offers the SEC's rationale: they don't believe that Grayscale can meet the requirements of the Exchange Act. Presumably the other ETF was able to do so.
steveBK123 4y ago
Could just be Proshares has their act together whereas Grayscale does not. Note Proshares also a long-bitcoin ETF. Both the long & short Proshares are futures based, and do not hold bitcoin. Grayscale it looks like was trying to launch a product directly linked to spot bitcoin, holding them in some sort of trust? Maybe SEC had concerns about custody.. Also, Proshares has historically been a big player in the ETF space, whereas Grayscale has.. as far as I can tell, a single ETF with ~$7M in assets.
- social_quotient 4y ago
  I get it but why allow for exotic derivatives and not the spot? It seems like you’d disallow derivative products until the spot was properly handled. (Custody concerns etc).
  - mattficke 4y ago
    Bitcoin futures are cash settled so there aren’t the same custody issues, there’s no delivery of the underlying involved.
    - social_quotient 4y ago
      Is the future not likely to be impacted the same way if the asset if manipulated? Several of the other comments on this thread mention that the future appears to be less likely to be manipulated. Intuitively I’d think they are wildly similar, or correlated, but I’m sure I don’t know enough here to understand why I’m wrong.
      - Galanwe 4y ago
        > Intuitively I’d think they are wildly similar, or correlated The thing is that if you are willing to bet on the price movement of a token, futures are a much more cost and capital efficient way to do so. - Its more capital efficient because you can leverage futures. Say you want an exposure of $1000 on the price of BTC and only have access to a spot market. You would need to actually buy $1000 worth of BTC, or use margin (a loan basically, but the interests are prohibitive). With futures, you would just need to maintain the required margin amount depending on your preferred leverage, so you could get that $1000 BTC exposure with a post of $100. For the same exposure of $1000, futures allows you to use less capital, or conversely with the same capital, you can have more exposure with futures. - Trading fees are much lower on futures, since this is mainly a virtual, exchange-owned instrument. There is often no actual movement of the underlying when trading futures, especially if everything is settled in cash. Futures trading fees are often significantly lower than spot. These advantages of futures often lead them to have _much_ more liquidity than the actual spot market, which in turn means they are much more stable. What we see often on small marketcap coins is that the ownership of tokens is opaque. Regularly, some whales (sometimes even unknowingly) dump huge amounts of the coin on the spot market, which leads to flash crashes until market makers can provide back some liquidity. This is very unlikely to happen on futures, since the liquidity is so much higher, dumping some millions worth in the market wouldn't dry out the book all that dramatically. I did not check numbers recently, but just to give you a rough idea, the daily traded amount on uniswap (spot, decentralized) should be around $1B/day, Binance spot should be around $10B/day, and Binance perpetual futures around $40B/day.
  - Galanwe 4y ago
    A future is not an "exotic" derivative, it's a "vanilla" product. Futures are mainly OK because there is no custody nor settlement of the underlying itself. Everything is settled in cash. In this respect, cash settled (inverse) crypto futures could almost be considered as having no link whatshowever with crypto currencies. This fine point is actually what allowed brokers to propose crypto futures ahead of any regulation.
    - steveBK123 4y ago
      Exactly, futures are essentially the most vanilla and ancient derivative product in the world. Hammurabi's Code references them as does Aristotle. The earliest uses have been primarily agricultural, allowing farmers to sell grain in advance for cash now and use that cash to fund operations in order to grow the grain.
  - steveBK123 4y ago
    Bitcoin futures trade on the CME, a well known and well regulated US-based exchange. They are cash settled so no bitcoin custody issues. The spot index price source the futures trade in reference to is a well documented methodology sourcing from multiple bitcoin exchange sources. https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cryptocurrency-benchmarks.html?redirect=/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cry... https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cryptocurrency-benchmarks.html?redirect=/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cry... By comparison, with Grayscale, who knows how custody works and what exchange exposure they may have.
  - quickthrowman 4y ago
    Exchange traded futures are not exotic derivatives, you can trade /BTC on a phone app with ~$30-50,000 of margin, depending on your broker. CME Bitcoin futures are cash settled, it doesn’t settle in actual BTC.
- thesausageking 4y ago
  Grayscale doesn't have many ETFs because the SEC refuses to approve crypto ETFs. Their Bitcoin trust (GBTC) has $13B under management, is carried by every major brokerage, and they've run it since 2013. They have the exact right expertise to run a Bitcoin ETF.
  - lalaland1125 4y ago
    The SEC refuses to approve spot crypto ETFs. The SEC approves future based crypto ETFs. Also, I wouldn't point to grayscale as an example of a good operator. Their Bitcoin trust is trading way below par.
    - gjs278 4y ago
ProjectArcturis 4y ago
There are several long BTC ETFs, they just only hold positions via the futures exchange. That's what the short ETF does as well, just with negative positions. Grayscale was applying to be a "physical" ETF, which would hold and buy and sell actual coins.
chollida1 4y ago
Non spot vs spot etf Th sec is fine with a futures based etf but for some reason doesn’t want a Spot etf. Which is strange because Canada has multiple spot etfs. Some arguments for not allowing a spot wtf is that the futures markets are regulated and smaller currently so a futures based wtf can’t grow as big as a spot one at the moment. Those aren’t great reasons because a lot of spot markets are now hosted by regulated companies like coin and gemini and the he sec said that futures based etfs can hold some of the Canadian spot etfs f they can’t get enough futures contracts Greyscale wins here by losing as it means they continue to get 2% a year in assets where as a spot etf would charge under 1%. The Discount to NAV trade continues on, with a 30% discount waiting to be unlocked. Funny story about this fund and its NAV. It helped sink the fund 3AC. In 2019 and 2020 it was a very crowded trade to give them BTC and get units back that were locked up for 6 months. The units at the time traded at a premium to its NAV( ie you gave 1,000,000 in BTC and got back units worth 1,200,000). Now the NAV has inverted such that the cost per share is less than the btc it holds due to funds like 3AC trying to get their money out. Lots of funds have lost alot of money trading this fund around, and if it was allowed to convert to an ETF none of those losses would have happened, and yet the SEC wont' allow them to convert for some reason :(
- Tesl 4y ago
  The SEC has no responsibility to save them from their own dumb trades
- tim333 4y ago
  Ah - guess that's the Grayscale Bitcoin Trust. I'm a bit slow keeping up with all the ETFs and stuff. Here's a nice graph of its premium/discount https://www.theblock.co/data/crypto-markets/structured-products/premium-of-gbtc https://www.theblock.co/data/crypto-markets/structured-produ... Interesting it was at a 100% premium to assets not so long ago

ProjectArcturis 4y ago

Poor Grayscale. It's going to be compelled to continue holding $43B in crypto and charging investors 2% a year.

etaioinshrdlu 4y ago

I find the document somewhat shockingly long. Almost like it is designed to confuse and create roadblocks. Can someone summarize what it means?

woodruffw 4y ago
It's a legal document. A lot of the length here is citations for prior rulings (take a look at Pages 3 and 4, for example). It's not "designed to confuse," but it also isn't intended to be light reading. The TL;DR is that the SEC does not believe that the Grayscale ETF can meet the requirements stipulated for an "Exchange-Traded Product" under the Exchange Act. In particular, the SEC found that a proposed rule change that would have allowed for the ETF violated the requirements of the Act under Section 6(b)(5). All of this is covered on Page 2. Subsequent pages cover precedent, various conditions under which other ETFs have been approved ("surveillance-sharing agreements"), and an extended justification for rejecting the proposed rule change.
dpierce9 4y ago
This is a thorough explanation of their reasoning with pointers to relevant laws and rules. Their position is that the law doesn’t allow them to approve this and they say which laws and why. What else do you want? A 140 character limit? Would you have preferred a stamp that say ‘Denied’ with no explanation? Congress requires agencies to explain themselves. This is a good thing and a sign that decisions aren’t arbitrary and that things are working.

mgamache 4y ago

Well they are suing [Will Argue SEC Violated Administrative Procedure Act and Securities Exchange Act of 1934] https://www.globenewswire.com/news-release/2022/06/30/2471737/0/en/Grayscale-Investments-Initiates-Lawsuit-Against-the-SEC.html https://www.globenewswire.com/news-release/2022/06/30/247173...

woodruffw 4y ago
Here is the crux of their argument (informally, I'd be interesting to see how they actually frame it in the suit): > As Grayscale and the team at Davis Polk & Wardwell have outlined, the SEC is failing to apply consistent treatment to similar investment vehicles, and is therefore acting arbitrarily and capriciously in violation of the Administrative Procedure Act and Securities Exchange Act of 1934,” added Donald B. Verrilli, Jr., Grayscale Senior Legal Strategist and former U.S. Solicitor General. “There is a compelling, common-sense argument here, and we look forward to resolving this matter productively and expeditiously." Given that the SEC has approved no other spot ETFs for BTC, I don't know how they can make the argument that the SEC has "failed to apply consistent treatment." Unless they're claiming that spot ETFs for BTC as a whole should be treated identically to other spot ETFs, which feels inconsistent with their larger argument for approval (that the Bitcoin market needs to be brought into the regulatory fold, implying that it's currently amenable to manipulation.)
- toolz 4y ago
  You can buy ETFs for all sorts of commodities, currencies and securities. No matter which umbrella bitcoin falls under, there are numerous etfs that can be be compared, right? Why is bitcoin or crypto special here? Is it the SECs job to make judgements on the assets that want to be included in the exchange?
  - woodruffw 4y ago
    > Is it the SECs job to make judgements on the assets that want to be included in the exchange? Yes, and that is the crux of the argument: the Exchange Act requires the SEC to evaluate ETPs for the possibility of "fraudulent and manipulative acts and practices." In other words: the SEC lacks confidence that approving a spot ETF for Bitcoin would not further advance manipulation and/or fraudulent behavior in the Bitcoin market.

kolbe 4y ago

This really sucks for Grayscale holders. As of the close today, $GBTC owners have the rights to $18.62 of Bitcoin per share and the market is pricing it at $13.32. And there is no way to redeem the shares for Bitcoin. By converting to an ETF, this would have become possible. But now, the $12.9b of assets Grayscale holds will be locked up in perpetuity while its investors watch the fees get eaten up.

futevolei 4y ago
A friend who does business with them said if the sec denied them they would file suit (check). If that doesn’t work they will open up a window to let holders convert at nav a portion of their holdings. For the remaining they are considering lowering their fees.
s1artibartfast 4y ago
Can shareholders or private equity liquidate the company? Seems like a lot of money to be made?
- wmf 4y ago
  I wonder if the slippage of liquidating $13B worth of Bitcoin is already priced in. In other words, if GBTC was liquidated maybe shareholders would only get $13 per share so the current market price is fair.
rkagerer 4y ago
Certainly sucks, but it's not unexpected there's a price differential. GBTC was never equivalent to real Bitcoin. I can understand some investors speculating they'd get the option to convert, but that exit always had risk attached (in terms of how long it would take and whether it ever happens).
paulgb 4y ago
As Morningstar has pointed out, Grayscale has the right to fix this themselves, but they choose not to. They allude to the fact that Grayscale takes a generous fee from the managed capital being a possible reason they don’t. > Grayscale has the power to flip this dynamic. Issuers of closed-end funds can redeem shares at the NAV; this allows investors to sell their shares back to the trust, which would close the discount. Using the example above, investors could exchange their $0.85 trust shares in for the $1.00 of Bitcoin it represents. […] > Yet the redemption option might be unpalatable for Grayscale. It would result in lower assets under management, as Grayscale would need to deliver Bitcoin to investors trading in its shares. The firm charges a whopping 2.00% management fee on trust shares (another factor that drives differences between the share price and the underlying Bitcoin), which it may be reluctant to give up with a smaller asset base. https://www.morningstar.com/articles/1068472/the-problems-with-the-worlds-biggest-bitcoin-fund https://www.morningstar.com/articles/1068472/the-problems-wi...

jonathan-adly 4y ago

The market thinks that the SEC is putting up road blocks to get the exchanges to register with them (currently, the only license needed to operate a US-based exchange is a money-transmitter license). The exchanges don’t want to register with the SEC, because according to them - they aren’t selling securities. Thus - the game of spot ETF. Grayscale isn’t rushing either, because they are farming management fees. Only ones losing is “investors”. The ones that the SEC suppose to protect.

woodruffw 4y ago
Really? You can't think of any significant investor risk that the SEC might have identified here? The SEC's response here is actually very even handed: they agree that there are advantages to a spot ETF for Bitcoin on a regulated exchange. The ruling observes that the presence of advantages is not sufficient: there must be proof that the rule change would not enable "fraudulent and manipulative acts and practices." They've also laid out how that proof might be obtained in the future: through a "surveillance-sharing agreement" that ensures transparency concerning the underlying assets.
- toolz 4y ago
  and which other spot ETFs are held to this standard? Proving a negative isn't something I'm aware of other ETFs being made to do.
  - woodruffw 4y ago
    To the best of my knowledge, all of them. This is law, not an undergraduate philosophy of logic class. "Proof" in these contexts means providing supporting or contradictory evidence; the SEC is stating that a company that wishes to offer a spot Bitcoin ETF must provide sufficient evidence that contradicts the other evidence that Bitcoin's market is susceptible to fraud and manipulation. Edit: The SEC lays out some of this evidence on pages 22ff.
    - yieldcrv 4y ago

Galanwe 4y ago

This is a spot versus future ETF issue. When applying for an ETF you have to prove that the underlying cannot be easily manipulated, and is evolving in a fair market. The current ETFs are based on BTC futures from CME, which is a high quality, regulated, futures exchange. The SEC is basically saying that the spot BTC market cannot be trusted, is not regulated enough, subject to potential manipulation (as defined by Grayscale of what is BTC spot market). There are points to be made for the SEC's arguments, depending on what Grayscale defines as being "BTC spot". I did not read their application but I can guess they would have to prove the spot market reference price (the ETF index) is a somewhat aggregated value based on multiple markets avg(binance, uniswap, sushiswap, coin base, ...) and failed to convince it could be trusted. Considering most of these markets are beyond SEC's reach, it sort of makes sense. There are also arguments in favor of Grayscale, mainly because the future price is based on the spot price, so a manipulation on the latter would reflect on the former.

nu11ptr 4y ago
> There are also arguments in favor of Grayscale, mainly because the future price is based on the spot price, so a manipulation on the latter would reflect on the former To me this is everything. If you can't trust spot, then you can't trust futures because futures price will immediately start moving towards the manipulated spot price. Therefore, in my opinion, this is just a game the SEC is playing for whatever reasons.
- smabie 4y ago
  crypto futures price often leads spot, not the other way around. However CME crypto futs don't really lead anything.
  - nu11ptr 4y ago
    I would agree in most cases that is the way it plays out, but then there is no issue either since SEC trusts futures. In the case of direct spot manipulation, spot would in that case lead futures which would no doubt follow suit to whatever price spot had. Regardless, I'm sure there is much arbitrage between them, so saying one is trustworthy and the other is not, is silly in my opinion. Iow, if there is a problem with one then neither should be allowed, not one or the other.

jcranmer 4y ago

Here is the tl;dr of why it was rejected, from a brief skimming: The spot bitcoin price used to compute the ETF is based on unregulated exchanges in a sector that is concentrated, and rife with fraud and market manipulation (which the entity applying for the ETF does not deny!). The guard rails to make sure that the ETF is insulated from fraud and market manipulation are... not really there. Basically "we believe the exchanges we use to compute Bitcoin price information are free from fraud and market manipulation."

yieldcrv 4y ago
Not the SEC’s job. It is an application of multiple acts that never envisioned ETFs wrapped around commodities. No person in Congress ever said “hey you know how you don't judge the merit of investments, by design, well we want to add in subsection 8) to make an exception to that for ETFs full of spot commodities”

steveBK123 4y ago

(edit) I find it unfortunate how far we have come from people being mad at SEC for not catching a lot of the 2008 era frauds. Now we have people mad that SEC won't rubber stamp a spot bitcoin ETF to allow more dumb money to enter the crypto space as exit liquidity with fewer clicks. We should be happy the SEC is taking a serious look in advance in order to do some prevention, rather than closing the doors after the horse has bolted which is the usual course of action..

dang 4y ago
Please don't post in the flamewar style about classic flamewar topics. It leads to flamewars, which we're hoping to avoid here because they're so nasty and so repetitive. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html (Your other comments in this thread seem vastly better and much more in keeping with the intended spirit of the site.)
- steveBK123 4y ago
  fair, edited
  - dang 4y ago
    Appreciated!
LatteLazy 4y ago
The SECs job isn't to stop people making mistakes or bad decisions. It's meant to stop people being treated unfairly and to ensure orderly markets. If people want to throw money at ShitCoin, that's their right. The SEC just needs to make sure it's clear what they're buying and the market for the ETF works as expected...
- JumpCrisscross 4y ago
  > SEC just needs to make sure it's clear what they're buying and the market for the ETF works as expected Which APs can’t do if the spot price is untrustworthy.

paulpauper 4y ago

Not a fan of BTC but I think it's time to approve this How would a bitcoin ETF be riskier than stuff which already exists like UVXY, which has lost 99.9999% of it value since inception and has even more volatility

runeks 4y ago
It’s not about risk or volatility. It’s about the SEC thinking there are no trustworthy sources of the BTC spot price.
- Galanwe 4y ago
  I feel like this comment actually sums up perfectly the whole discussion on this post.
ac29 4y ago
> How would a bitcoin ETF be riskier than stuff which already exists like UVXY, which has lost 99.9999% of it value since inception UVXY is one of those things only meant to be held a short time (1 trading day or less). Historical pricing isnt really meaningful (its shown as being priced over $1B per share at inception on several sites, which is wrong).

erung88 4y ago

It's SEC playground so they can reject whatever what they want. For those who truly believe in cryptos, they will invest in cryptos directly bypassing the traditional financial system.

TedShiller 4y ago

maybe they'll approve ApeCoin ETF though

ufo 4y ago

Does anyone know where I can find a TL;DR of the whole Grayscale bitcoin trust thing? I have heard some people say that they wanted to become an ETF because the trust doesn't allow them to sell the bitcoin, only hold it. Is that true? I really don't understand what's happening.

api 4y ago

Good decision. After the big "fortune favors the bold!" ad blitz of last year the pot of greater fools willing to pour money into cryptocurrency (without understanding it) is probably pretty tapped out. At this point the only way to keep the music going is to find a way to tap and drain pension funds, endowments, IRAs, and other sources of more conservative money that reside in public markets. Keep that from happening and the Ponzi collapses unless they can find some other source. The only other one I can think of is flight capital from China and Russia. That's always been a factor in propping up crypto but the thing is they're not HODLers. They don't care about propping up crypto, just using it to get money out of places with capital controls. Once the money is out they're likely to liquidate on the other side. Wire transfer is one of the few areas of actual utility in cryptocurrency but it doesn't really prop up the Ponzi. The same applies to money laundering. They're using crypto as a vehicle to launder money but once laundered they want the money back in generally usable form. They're not HODLing.

upupandup 4y ago

Definition of insanity is attempting the same thing over and over and expecting a different result. This is what Bitcoin spot ETF proponents will just not admit. There's zero chance spot prices of bitcoin which have been irrefutably proven to be prone to manipulation. They are desperate to pump Bitcoin prices its frankly comical.