Bitcoin enthusiasts eager for the digital currency to go mainstream have had a disappointing month.
The Securities and Exchange Commission on Tuesday rejected a bid to list shares of the SolidX Bitcoin Trust on an affiliate of the New York Stock Exchange. Less than three weeks earlier, the SEC denied a similar application to list a bitcoin exchange-traded fund backed by Cameron and Tyler Winklevoss. The two decisions appear to have slammed the doors on bitcoin ETFs for the time being.
That has some bitcoin fans pinning their hopes on another possible way forward: a U.S. futures contract.
“Once bitcoin futures are in the market, that paves the way for new vehicles and more liquidity that ultimately paves the way for an ETF,” said Chris Burniske, an analyst at ARK Investment Management LLC, a fund manager that has invested in bitcoin.
Mr. Burniske and others see potential for a bitcoin investment vehicle in the fine print of the March 10 order in which the SEC rejected a four-year effort by the Winklevoss brothers to launch a bitcoin ETF. The twin brothers had sought to list their Winklevoss Bitcoin Trust on the Bats BZX Exchange, now owned by CBOE Holdings Last week Bats asked the SEC to review the decision.
In the 38-page order, the SEC said the underlying markets where bitcoins are traded weren’t sufficiently regulated. It also said Bats didn’t have “surveillance-sharing agreements” in place with those markets to ensure that the price of bitcoin wasn’t being manipulated.
The regulator didn’t seem impressed by a surveillance pact that Bats had with the Winklevoss brothers’ own Gemini Exchange, saying it wasn’t a proper exchange subject to U.S. federal oversight and noting that only a small fraction of worldwide bitcoin trading took place on Gemini Exchange. Bitcoin is traded on dozens of spot exchanges around the world, from the U.S. to Europe to China.
That was bad news for Bats and the Winklevoss brothers. But it suggests the SEC could be open to approving an exchange-traded product sometime down the road if a more thoroughly regulated U.S. exchange, such as one of the futures exchanges run by CME Group or Intercontinental Exchange, listed a bitcoin contract and trading in it took off.
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Of course, having a futures contract wouldn’t change the fact that bitcoins are traded on lightly regulated markets outside the reach of U.S. law. But one could say the same thing about physical gold, and the SEC allows products like the SPDR Gold Trust, the popular gold ETF, to be traded on U.S. exchanges. Such products won SEC approval in part thanks to “significant, well-established, and regulated futures markets that were associated with the underlying commodity,” the regulator said in its March 10 order.
Lawyers say the Commodity Futures Trading Commission, which regulates CME and ICE, appears open to the introduction of bitcoin futures. The CFTC ruled in 2015 that bitcoin was legally a “commodity,” like crude oil or gold, and it has allowed the registration of TeraExchange LLC, a startup trading platform for bitcoin derivatives.
“The CFTC has already gotten past the hurdle of, ‘Can we do regulated products on bitcoin?’ And the answer is yes,” said Kevin Batteh, a former CFTC lawyer who is now a partner at lobbying firm Delta Strategy Group.
That leaves it up to the exchanges to make the next move. Neither CME nor ICE have unveiled plans to list bitcoin futures, but both market operators have bitcoin price indexes that could be the basis for such a contract. In November, CME launched a daily index that appears designed to ease regulators’ worries: it’s based on a weighted average of prices at six bitcoin exchanges and has an oversight committee tasked with minimizing the risk of manipulation.
If CME or ICE wanted to introduce bitcoin futures, there are two ways they could proceed. The faster way, a process called “self-certification,” allows an exchange to launch a contract without getting CFTC pre-approval. It would just need to give the regulator advance notice, which could be given as little as one day before the product started trading.
The slower way is to voluntarily seek the CFTC’s blessing before the launch. If the exchange chose to do that, the regulator would have 45 days to make a decision, which could be extended by another 45 days if the proposed product raised “novel or complex issues that require additional time to analyze,” CFTC regulations say.
In practice, exchanges tend to confer behind the scenes with staffers at the futures regulator to make sure a new product is acceptable before they file any paperwork, according to people with knowledge of how the process works.
Not everyone believes that bitcoin futures would immediately make the SEC comfortable with a bitcoin ETP. “It would have to be similar to oil and gold in that the liquidity of the futures market is so deep that it’s a major venue for price discovery,” said Dave Lauer, chairman of the Healthy Markets Association, an industry group. “Oil and gold are more traditional markets.”
Then even if bitcoin futures took off, it would take time for a new ETP to emerge. Mr. Burniske, of ARK, estimates it would take 12 to 18 months for the creators of a new bitcoin investment vehicle to put together all the necessary filings and win SEC approval.
Still, he’s hopeful about bitcoin futures. “We’ve got a number of people doing a dance right now about who’s going to incrementally legitimize bitcoin,” Mr. Burniske said. And right now, he added, launching a CFTC-regulated product “looks like the area with the most promise.”