SEC unlikely to approve ProShares bitcoin ETF on Thursday

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• The SEC makes its verdict on a bitcoin-futures linked
  ETF by ProShares on Thursday. 
• Some market observers say that the fact that the
  product is based on futures, not bitcoin itself, could help its
  case. 
• But market experts say the opaqueness of the crypto
  markets and possible manipulation still make an approval
  unlikely. 

Bart Smith, head of digital assets at Susquehanna International
Group, is used to taking risks.  

As a trader, “You never say no chance,” he said. 

But Smith thinks there’s just a 1% likelihood that the
Securities and Exchange Commission will on Thursday approve an
exchange-traded fund linked to bitcoin for the first time. The
funds, proposed by asset manager ProShares, were first filed with
regulators last September and are linked to Cboe Global Markets’
bitcoin future contracts, not bitcoin itself. 

A bitcoin ETF has long been viewed as a next step in bitcoin’s
maturation as an asset class and a way to breath new life into
the crypto which has struggled to break through $10,000 for much
of 2018. 

Some market observers think that the fund’s connection to the
futures markets, which are regulated by the Commodity Futures
Trading Commission, would make its approval more likely than past
proposals, including one in July by VanEck which was also
rejected by regulators.

Smith isn’t so sure. 

“You’re literally shifting deck chairs on the Titanic,” he
said. 

A representative for ProShares could not be reached for
comment. 

Issues in the market

Even though a futures-based ETF would trade on Cboe, the price of
those contracts are still tied to unregulated bitcoin venues in
international markets, according to Richard Johnson, a market
structure specialist at Greenwich Associates. 

A slew of asset managers, including Bitwise Asset Management,
GraniteShares, and Direxion have filed for a bitcoin ETF, and are
all waiting in limbo for a verdict from the SEC. 

The SEC itself said
after it denied a Winklevoss brothers’ bitcoin ETF in July for
the second time that it could not “conclude that
bitcoin markets are uniquely resistant to
manipulation.”

Not much has been done since to address those concerns or
prove that they are unwarranted, experts say. 

Notably, Bloomberg
published a report examining more than 50,000 trades on Kraken’s
market that experts said raised red flags. Elsewhere,
academics at the University of Texas
published a
paper alleging that Tether was last year used to manipulate the
price of bitcoin, propping up its run to $20,000 in December.

Some steps have been taken to improve the surveillance of the
market, Johnson said. Several cryptocurrency exchanges including
the Winklevoss brothers’ Gemini are teaming
up to form a new working group to create new standards to stamp
out manipulation and address the opaqueness of the market.
Still, the group excludes Coinbase — the largest crypto exchange
in the US — and foreign exchanges in Asia, which command a large
percentage of the market. 

Proponents for a bitcoin ETF counter that bitcoin markets are
difficult to manipulate since they are very fragmented. Others
point to the liquidity of the market, which sees turnover in the
multi-billions, as another sign that market is ready for an
ETF. 

But John Hyland, global head of exchange traded funds at Bitwise,
says it’s unlikely the SEC will be convinced by that
argument. 

“They’re not going to be swayed by what sounds plausible and what
might be true,” he said. 

For that reason, it’s likely the ProShares filing will either get
denied by the SEC or the firm with withdraw the proposal, Hyland
said. 

Crypto exchanges need to cooperate 

For a bitcoin ETF to get approved, whether it’s based on futures
or bitcoin itself, crypto exchanges will need to start
cooperating more with each other to make the market more
transparent, said Dave Weisberger, the chief executive of crypto
data company CoinRoutes. 

Weisberger, who argues that bitcoin markets are robust enough to
support a derivative product like an ETF, thinks such a product
would have a better chance of getting off the ground if crypto
exchanges allowed market data to be made public. That would help
investors find the best venues to execute crypto trades, he
said. 

“Simply put, these exchanges have taken a legal approach
that doesn’t allow the public to comparison shop for ‘best
execution,'” Weisberger said.

If crypto exchanges were to adopt these policies and
robustly address cross-exchange manipulation, then the SEC’s
stance on a crypto ETF could change, he added. 

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