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Bitcoin Futures Contracts Debut Next Month as SEC Delays Bitcoin ETF Decisions

The US Securities and Exchange Commission continues to delay its Bitcoin ETF decision on the Bitwise Bitcoin ETF Trust and the VanEck SolidX Bitcoin Trust, while Bakkt claims its acquired a New York state trust charter through the New York State Department of Financial Services (NYDFS), enabling the company offer its physically-settled bitcoin futures contracts.

For the cryptocurrency community, the Bitwise and VanEck delays are nothing new. Rejection or approval of those investment vehicles will now have to wait until October 2019.

There is a well-documented history of such delays in recent years.

The Winklevoss twins, a set of American internet entrepreneurs, submitted a Bitcoin ETF proposal nearly three years ago. The SEC rejected their proposal in March 2017. The agency claimed Bitcoin is too volatile of an asset and subject to manipulation.

At that time, the agency also cited that Bitcoin is resistant to surveillance. Despite being a transparent blockchain, meaning each transaction and its transaction id can be seen by the public, Bitcoin transactions do not include personal user information. No names, no social security numbers, etc.. The rise in popularity of blockchain analysis firms has helped counter those concerns ever since. For instance, BitFury, a leading software and hardware provider in the blockchain industry, launched Crystal, an AML/KYC division. Chainalysis, based in Manhattan, focuses on “spotting connections between entities on the Bitcoin blockchain” in order to detect fraud and prevent money laundering.

Other Bitcoin ETF proposals have been either rejected or delayed. Efforts by SolidX and Grayscale Investments were for naught in 2017. The SEC allowed the public to comment in regards to these trading vehicles.

At that time, it also became apparent applicants had a lot of work ahead of them. Particularly the Grayscale Investments proposal highlighted key issues. Still, Bitcoin’s price volatility, troublesome price discovery, and growing list of unregulated trading platforms have all detered the SEC from approving most ETF vehicles.

Things seemingly started to look up in 2018. Albeit, the SEC continued to reject Bitcoin ETF applications last year, the reasons for doing so evolved, as the SEC made it clear that companies need to prevent fraudulent and manipulative acts and practices.

Around this time, Hester Peirce, an American lawyer specializing in financial market regulation who currently serves as a Commissioner on the SEC, publicly opposed her SEC colleagues. In her opinion, the agency isn’t focusing its attention where it should be. Peirce claims the 2018 rejection of BZX’s application has nothing to do with the company’s own abilities to surveil trading. Instead, the proposal was rejected due to how spot Bitcoin trading takes place.

“…I am concerned that the Commission’s approach undermines investor protection by precluding greater institutionalization of the bitcoin market,” she wrote in her dissent letter. “More institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order. More generally, the Commission’s interpretation and application of the statutory standard sends a strong signal that innovation is unwelcome in our markets, a signal that may have effects far beyond the fate of bitcoin ETPs. I will discuss each of these issues in turn.”

She concluded: “By precluding approval of cryptocurrency-based ETPs for the foreseeable future, the Commission is engaging in merit regulation. Bitcoin is a new phenomenon, and its long-term viability is uncertain. It may succeed; it may fail. The Commission, however, is not well positioned to assess the likelihood of either outcome, for bitcoin or any other asset. Many investors have expressed an interest in gaining exposure to bitcoin, and a subset of these investors would prefer to gain exposure without owning bitcoin directly. An ETP based on bitcoin would offer investors indirect exposure to bitcoin through a product that trades on a regulated securities market and in a manner that eliminates some of the frictions and worries of buying and holding bitcoin directly. If we were to approve the ETP at issue here, investors could choose whether to buy it or avoid it. The Commission’s action today deprives investors of this choice. I reject the role of gatekeeper of innovation—a role very different from (and, indeed, inconsistent with) our mission of protecting investors, fostering capital formation, and facilitating fair, orderly, and efficient markets. Accordingly, I dissent.”

Peirce’s dissent is a key turning point in the history of Bitcoin ETFs. The 2018 Winklevoss ETF would go on to receive some supportive comments during a SEC consultation. What is even more remarkable is how this application gained support from non-cryptocurrency enthusiasts as well. Despite this growing support, little has changed in terms of Bitcoin ETFs since that time, though taxation and regulatory guidelines have become clearer in numerous countries. Recent letters sent to suspected Bitcoin holders by the IRS only confirm there is a growing focus on Bitcoin activity in general.

But the good news from Bakkt is something new for the cryptocurrency industry. This venture can now offer derivatives which pay out in Bitcoin to its investors. The company has received approval to act as a custodian over customers’ funds. It is expected its first Bitcoin-paid derivative contracts will be offered come September 23.

“Our contracts have already received the green light from the CFTC through the self-certification process and user acceptance testing has begun,” Bakkt CEO Kelly Loefler wrote in a blog post on Friday. “With approval by the New York State Department of Financial Services to create Bakkt Trust Company, a qualified custodian, the Bakkt Warehouse will custody bitcoin for physically delivered futures,” she said. “This offers customers unprecedented regulatory clarity and security alongside a regulated, globally accessible exchange in a market underserved by institutional-grade infrastructure.”

She added: “Uniquely, Bakkt bitcoin futures contracts will not rely upon unregulated spot markets for settlement prices, thus serving as a transparent price discovery mechanism for the benchmark price for bitcoin. The importance of this differentiator is only amplified by reports of significant manipulative spot market activity, and other concerns such as inconsistent anti-money-laundering policies and weak compliance controls.”