June 14, 2018

Will Shares of VanEck SolidX Bitcoin Trust be the First Bitcoin ETF?

Holland & Knight Blockchain Blog
Jennifer A. Connors | Josias N. Dewey | Rebecca Leon | David P. Sofge

Let's see if this one hits the mark

On June 6, 2018, VanEck SolidX Bitcoin Trust filed an amended registration statement designed to address many of the concerns raised by the SEC in its prior considerations of ETFs referencing Bitcoin. All prior considerations by the SEC of ETFs referencing Bitcoin products have resulted in rejection by the SEC or voluntary withdrawal. The Trust will invest substantially all of its assets in Bitcoin traded primarily in the over-the-counter market. The Trust will be insured against loss of Bitcoin as a result of theft, loss in transit, hacking and loss of private keys. Valuations for Bitcoin will be based on prices announced by MVBTCO, a real-time U.S. dollar denominated composite rate for the price of Bitcoin. MVBTCO's prices are to be based on the actual firm bid/ask data from several Bitcoin over-the-counter platforms. Offerings by the Trust would be made only in blocks of five shares in order to target institutional investors.

On June 6, Jay Clayton, chairman of the SEC, in an interview on CNBC reiterated the continuing relevance of SEC communications to the marketplace of criteria necessary to satisfy the SEC's concerns about Bitcoin-backed ETFs. On April 5, 2018, the SEC by way of an order instituted proceedings to approve or disapprove the proposal by the Cboe BZX Exchange Inc. to list and trade the shares of the GraniteShares Bitcoin ETF (Long Fund) and the GraniteShares (Short Fund). As opposed to the VanEck SolidX Bitcoin Trust, the GraniteShares Bitcoin ETF proposed to reference Bitcoin futures contracts listed and traded on the Cboe Futures Exchange. In the GraniteShares order the SEC requested public comment on a list of issues, which can be read as the SEC's legal and policy concerns about ETFs referencing Bitcoin or Bitcoin futures. Read a copy of the order.

On Jan. 18, 2018, Dalia Blass, director of the Division of Investment Management of the SEC addressed a letter to SIFMA and the Investment Company Institute setting forth concerns about how funds holding a substantial amount of cryptocurrencies and related products could satisfy the requirements of the Investment Company Act of 1940 (the 40 Act). Notably, the registration statement for the VanEck SolidX Bitcoin Trust states that it is not an Investment Company registered under the 40 Act, and therefore certain concerns arising out of the 40 Act are inapplicable to that trust. She concluded the letter by advising funds not to apply for registration until the concerns addressed in the letter are addressed. Read a copy of the Dalia Blass letter.

The principal concerns expressed in the GraniteShares order and the Dalia Blass letter are valuation and liquidity. The list of questions for public comment contained in the GraniteShares order suggests that the concerns expressed in the Dalia Blass letter have not be resolved in that proposal, and the SEC in the order articulates those concerns with more specificity.


The SEC questions the ability to determine daily NAV given the nascent state of the Bitcoin futures market and the current low trading volumes. It questions if funds would have the ability to determine fair value of Bitcoin or Bitcoin related products in light of volatility, fragmentation, general lack of regulation of the underlying Bitcoin market and price differentials across trading platforms (including during periods of market stress). It questions the possible factors that might impair the ability of the arbitrage mechanism to keep the price of the shares tied to NAV. The SEC also expresses concern about how a fund would deal with valuation issues in the event of a "fork," "air drop," potential market price manipulation and fraud with respect to the underlying currency, and the unregulated nature of the Bitcoin market outside the US. In the GraniteShares order, the SEC seeks commenters' view on how an investor may evaluate the price of a share of an ETF in light of the potentially significant spread between the Bitcoin futures contract and the spot price of Bitcoin.


Funds must maintain sufficient liquid assets to provide for daily redemptions, funds registered under the 40 Act are limited to 15 percent of their assets in illiquid assets. The SEC questions the liquidity of cryptocurrencies and cryptocurrency-related products and if they could be classified as other than illiquid for the purpose of 40 Act liquidity tests. The SEC solicits views on how the substantial margin requirements for Bitcoin futures and the volatility in the market for Bitcoin futures will affect the ability of funds to meet redemption orders and to manage cash positions. The SEC questions if funds referencing Bitcoin futures could eventually acquire such a substantial portion of the market for Bitcoin futures as to affect the liquidity of the fund's investments. Finally, the SEC asks if the size of the existing Bitcoin futures market is a market of significant size.

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