The Chicago Board Options Exchange (Cboe), the largest options exchange in the global market that currently operates a bitcoin futures market, has asked the US government to allow bitcoin exchange-traded funds (ETFs) that would provide investors within the public market with access to bitcoin.
A public letter sent to the US Securities and Exchange Commission (SEC) read:
Cboe encourages the Commission to approach Cryptocurrency ETPs [exchange-traded products] holistically and from the same perspective that it has historically approached commodity-related ETPs. The Commission should not stand in the way of such ETPs coming to market.
Lack of Regulation and Liquidity
Last January, the SEC rejected two bitcoin ETF proposals from the Winklevoss twins and SolidX, citing the lack of regulations in the global cryptocurrency market. Over the past 12 months, countries like South Korea and Japan have employed stricter regulations than the US market through a licensing program for cryptocurrency exchanges, and countries like the Philippines have recognized bitcoin as a remittance method.
All cryptocurrency exchanges in regulated nations are equipped with complete Know Your Customer (KYC) and anti-money laundering (AML) systems that allow governments to cooperate with exchanges in cracking down on suspicious transactions and criminal activities involving cryptocurrencies.
Coin Center executive director Jerry Brito previously said in response to the initial rejection of the Winklevoss twins’ bitcoin ETF that it is illogical to prevent investors in the public market from entering the cryptocurrency market if the government wants the cryptocurrency market to be regulated and evolve into a proper asset class.
“The Winklevoss ETF proposal was rejected because the SEC found that the significant markets for Bitcoin tend to be unregulated overseas markets that are potentially subject to price manipulation. But this creates a chicken and egg problem. How do we develop well-capitalized and regulated markets in the U.S. and Europe if financial innovators aren’t allowed to bring products to market that grow domestic demand for digital currencies like Bitcoin?” said Brito.
Given that bitcoin specifically has been able to service public investors through the Cboe futures market with regulations that are on par with current policies that govern financial institutions like banks, Cboe has encouraged the SEC to allow bitcoin ETFs and provide a regulated channel for public investors to invest in the cryptocurrency market.
Liquidity is a Non-Issue
Dalia Blass, director of the SEC’s division of investment management, explained in early 2017 that ETFs could not be created around cryptocurrencies due to their lack of liquidity, as this makes the market vulnerable to manipulation.
Cboe president and COO Chris Concannon emphasized that problems with liquidity and arbitrage can be solved if investment vehicles such as ETFs can better facilitate the growing demand from investors for exposure to the cryptocurrency market.
“While Cboe shares many of the concerns raised in the Staff Letter, we believe that the vast majority of these concerns can be addressed within the existing framework for commodity-related funds related to valuation, liquidity, custody, arbitrage, and manipulation,” added Concannon.
If the chief concern of the SEC and other financial agencies in the US including the Commodities and Futures Trading Commission (CFTC) is the lack of liquidity in the cryptocurrency market, a public investment vehicle or channel like an ETF can significantly increase the liquidity of bitcoin, especially in the US. The introduction of an ETF could lead the market to increased stability and lower volatility, allowing the asset class to evolve.