7 ms·

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

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.
    - steveBK123 4y ago
      US ETFs are regulated assets trading on regulated exchanges, holding or linked to other regulated assets on regulated exchanges. Regulations all the way down. The whole crypto space has been trying to have it both ways and get the veneer of well regulated assets on regulated exchanges, without having to face any regulation on the spot or spot exchanges themselves. It is akin to me deciding to start an ETF in the US, listed on NYSE, linked to Topps baseball cards which I trade on eBay and hold in a vault in my moms basement. Not gonna fly with the SEC.
- JumpCrisscross 4y ago
  > if you can't trust spot, then you can't trust futures because futures price will immediately start moving towards the manipulated spot price The problem isn’t solely a manipulated spot price. It’s there being no spot price. If exchanges start diverging, the mechanisms holding the ETF stable collapse or become fraudulently misleading. (For example, if Grayscale references the Gemini price for unit creation/destruction and the Gemini price is double that on Kraken.) This will create havoc in the futures market, too. But the havoc is pushed to the periphery. The contract participants bear the pain. The central clearinghouse will continue creating a value for the future, and that value will port truly to the ETF. That leaves all the central mechanics, from borrow/lend to derivatives and even settlement, unharmed. (If the central clearinghouse halts, then everything halts simultaneously. Totally different from a commodity market.)
deleted 4y ago
[deleted]
Galanwe 4y ago
Replying to myself because I think people are overreacting to the last paragraph. There is a case to be made that BTC spot and future are not delta one. I did not check specifically for BTC, but often in crypto the liquidity on futures is much higher than on spot, which makes the futures market much less sensible to market manipulation, flash crashes, whale dropping, etc. Holdings are also much clearer and easier to assess for regulated futures than for spot.
- ryanobjc 4y ago
  CME futures are nothing you described above. Their liquidity is very poor, with tons of gaps in the price chart, and maybe like max 500M of vol a day, on the highest vol day, but really more like 120M vol a day. The reality is a lot of the vol on btc is due to liquidations. On one hand, volatility, on the other, crypto liquidations are much more fair than stock market margin.
nnx 4y ago
SEC's argument that spot BTC market cannot be trusted is quite ironic considering BTC is perhaps the only free market left, and all exchanges publish all trades and order flow in real-time for free, for everyone... which is so transparent compared to traditional exchanges selling order flow to HFT firms.
- wmf 4y ago
  all exchanges publish all trades and order flow in real-time for free, for everyone Why do you believe that? Exchanges have been caught lying and cheating multiple times.
  - nnx 4y ago
    There's no need to believe, it's all public data and many thousands traders/bots are using those to trade every day... if the orders were fake it would be known and arbitraged very quickly. Talking here about all the major exchanges with actual volume (Coinbase, FTX, Binance, etc) of course might not apply to some scammy third-tier exchanges with no volume.
    - Galanwe 4y ago
      > There's no need to believe, it's all public data Well I don't think you quite imagine the sheer amount of requirements a regulated exchange has to through. Though I don't think major crypto exchanges (Binance, Coinbase,...) are blatantly cheating per se, they are still light years away from having the same level of compliance as traditional SEC regulated exchanges. > if the orders were fake it would be known Also, you seem to only consider obvious fraudulent behaviors, but there are literally millions of ways to exploit order flow when you're an exchange or broker, that are completely impossible to see from the outside.
  - bouncycastle 4y ago
    Not decentralized exchanges, like Uniswap and Sushi, where you can see everything in real-time.
nivertech 4y ago
IMO the point is that futures as a derivatives are for more sophisticated traders, they're less frequently used by retail traders or in a personal pension accounts. And anyway they're regulated by CFTC and out of the SEC's mandate. The investment objectives of the futures are trading profits, speculation, and hedging. ETFs to the contrary are much more popular by retail traders and frequently used in a personal pension accounts. The investment objectives of the ETFs are preservation of the capital, income, and growth. So the issue of the easily manipulated spot price is less problematic for derivatives/futures, and much more problematic for securities/equities/ETFs. CFTC has the mandate to prevent manipulations in the underlying spot markets for any derivatives traded in US. The fact the CME (and other exchanges) introduced Bitcoin futures, put CFTC in charge of the spot markets too.
- junofan 4y ago
  Not sure people are margin trading Ultra VIX and 3x bull ETFs for capital preservation and growth in their personal pension accounts… ETFs are funds that trade like stocks. That’s basically it.
  - nivertech 4y ago
    I omitted this for brevity, but you're right. Yes, stocks and other exchange traded products like ETFs (especially their leveraged and short verities) can also be used for trading profits as an investment objective. That what pros and retail day traders are doing. But I doubt lots of people day trading in their personal pension accounts.
yieldcrv 4y ago
And all of this is a false dilemma. The SEC being in a position to use its own arbitrary discretion to gatekeep an investment’s existence and availability to retail investors is pure happenstance that only exists in a subset of ETFs due to the F part meaning Fund. Otherwise the SEC specifically does not judge the merit of investments, it advocates for 100 pages of disclaimers and says “we did it guys! We protected investors!” For the issuer, most SEC compliance is simply posting a notice to the SEC, not asking them for permission. It is an extremely broad interpretation of a multitude of investment acts that has the SEC looking deep into the spot markets of an entirely different asset class to make any arguments at all. And its also their choice to do that, its their choice to act out of character specifically for crypto (they stonewalled gold etfs for a long time too though).
tim333 4y ago
The report goes on a lot about "surveillance-sharing agreements" >The Commission has long recognized that surveillance-sharing agreements “provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur” ... I guess bitcoin is inherently a bit hard to surveil what with much of the trading being offshore and unregulated.

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.
  - steveBK123 4y ago
    US ETFs are regulated assets trading on regulated exchanges, holding or linked to other regulated assets on regulated exchanges. Regulations all the way down. The whole crypto space has been trying to have it both ways and get the veneer of well regulated assets on regulated exchanges, without having to face any regulation on the spot or spot exchanges themselves. It is akin to me deciding to start an ETF in the US, listed on NYSE, linked to Topps baseball cards which I trade on eBay and hold in a vault in my moms basement. Not gonna fly with the SEC.
JumpCrisscross 4y ago
> if you can't trust spot, then you can't trust futures because futures price will immediately start moving towards the manipulated spot price The problem isn’t solely a manipulated spot price. It’s there being no spot price. If exchanges start diverging, the mechanisms holding the ETF stable collapse or become fraudulently misleading. (For example, if Grayscale references the Gemini price for unit creation/destruction and the Gemini price is double that on Kraken.) This will create havoc in the futures market, too. But the havoc is pushed to the periphery. The contract participants bear the pain. The central clearinghouse will continue creating a value for the future, and that value will port truly to the ETF. That leaves all the central mechanics, from borrow/lend to derivatives and even settlement, unharmed. (If the central clearinghouse halts, then everything halts simultaneously. Totally different from a commodity market.)

deleted 4y ago

[deleted]

Galanwe 4y ago

Replying to myself because I think people are overreacting to the last paragraph. There is a case to be made that BTC spot and future are not delta one. I did not check specifically for BTC, but often in crypto the liquidity on futures is much higher than on spot, which makes the futures market much less sensible to market manipulation, flash crashes, whale dropping, etc. Holdings are also much clearer and easier to assess for regulated futures than for spot.

ryanobjc 4y ago
CME futures are nothing you described above. Their liquidity is very poor, with tons of gaps in the price chart, and maybe like max 500M of vol a day, on the highest vol day, but really more like 120M vol a day. The reality is a lot of the vol on btc is due to liquidations. On one hand, volatility, on the other, crypto liquidations are much more fair than stock market margin.

nnx 4y ago

SEC's argument that spot BTC market cannot be trusted is quite ironic considering BTC is perhaps the only free market left, and all exchanges publish all trades and order flow in real-time for free, for everyone... which is so transparent compared to traditional exchanges selling order flow to HFT firms.

wmf 4y ago
all exchanges publish all trades and order flow in real-time for free, for everyone Why do you believe that? Exchanges have been caught lying and cheating multiple times.
- nnx 4y ago
  There's no need to believe, it's all public data and many thousands traders/bots are using those to trade every day... if the orders were fake it would be known and arbitraged very quickly. Talking here about all the major exchanges with actual volume (Coinbase, FTX, Binance, etc) of course might not apply to some scammy third-tier exchanges with no volume.
  - Galanwe 4y ago
    > There's no need to believe, it's all public data Well I don't think you quite imagine the sheer amount of requirements a regulated exchange has to through. Though I don't think major crypto exchanges (Binance, Coinbase,...) are blatantly cheating per se, they are still light years away from having the same level of compliance as traditional SEC regulated exchanges. > if the orders were fake it would be known Also, you seem to only consider obvious fraudulent behaviors, but there are literally millions of ways to exploit order flow when you're an exchange or broker, that are completely impossible to see from the outside.
- bouncycastle 4y ago
  Not decentralized exchanges, like Uniswap and Sushi, where you can see everything in real-time.

nivertech 4y ago

IMO the point is that futures as a derivatives are for more sophisticated traders, they're less frequently used by retail traders or in a personal pension accounts. And anyway they're regulated by CFTC and out of the SEC's mandate. The investment objectives of the futures are trading profits, speculation, and hedging. ETFs to the contrary are much more popular by retail traders and frequently used in a personal pension accounts. The investment objectives of the ETFs are preservation of the capital, income, and growth. So the issue of the easily manipulated spot price is less problematic for derivatives/futures, and much more problematic for securities/equities/ETFs. CFTC has the mandate to prevent manipulations in the underlying spot markets for any derivatives traded in US. The fact the CME (and other exchanges) introduced Bitcoin futures, put CFTC in charge of the spot markets too.

junofan 4y ago
Not sure people are margin trading Ultra VIX and 3x bull ETFs for capital preservation and growth in their personal pension accounts… ETFs are funds that trade like stocks. That’s basically it.
- nivertech 4y ago
  I omitted this for brevity, but you're right. Yes, stocks and other exchange traded products like ETFs (especially their leveraged and short verities) can also be used for trading profits as an investment objective. That what pros and retail day traders are doing. But I doubt lots of people day trading in their personal pension accounts.

yieldcrv 4y ago

And all of this is a false dilemma. The SEC being in a position to use its own arbitrary discretion to gatekeep an investment’s existence and availability to retail investors is pure happenstance that only exists in a subset of ETFs due to the F part meaning Fund. Otherwise the SEC specifically does not judge the merit of investments, it advocates for 100 pages of disclaimers and says “we did it guys! We protected investors!” For the issuer, most SEC compliance is simply posting a notice to the SEC, not asking them for permission. It is an extremely broad interpretation of a multitude of investment acts that has the SEC looking deep into the spot markets of an entirely different asset class to make any arguments at all. And its also their choice to do that, its their choice to act out of character specifically for crypto (they stonewalled gold etfs for a long time too though).

tim333 4y ago

The report goes on a lot about "surveillance-sharing agreements" >The Commission has long recognized that surveillance-sharing agreements “provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur” ... I guess bitcoin is inherently a bit hard to surveil what with much of the trading being offshore and unregulated.