Thread by @jchervinsky

0/ Last week, the SEC delayed its decision on the VanEck/SolidX bitcoin ETF for the last time. With a *final* deadline set for February 27, let's discuss:

- key updates from the past few months
- how to interpret this delay
- my prediction on what the SEC will decide

Thread. 👇

1/ I'll say this upfront: I think the ETF is in trouble.

I'll explain why below, but first I want to stress that VanEck & SolidX have done great work this year. Unfortunately, some things are out of their control, and it's possible the markets just aren't ready for an ETF yet.

2/ When we last discussed the ETF on September 20, the SEC had just stated its "grounds for disapproval under consideration."

The goal of that step is for the SEC to explain all the reasons why it might deny the ETF so the sponsors & the public can respond to them all.

3/ The SEC had many concerns--enough for 18 multi-part questions.

The most important question was about market manipulation. The SEC wanted to know if CBOE BZX (the exchange proposing the ETF) had "a surveillance-sharing agreement with a regulated market of significant size."

4/ I call this the most important question because it's the main issue that killed the Winklevoss ETF on appeal in July 2018 (after initial denial in March 2017).

And the Winklevoss appeal denial is the most important SEC decision because it came straight from the Commissioners.

5/ For context, a surveillance-sharing agreement would involve a crypto exchange voluntarily giving detailed information to CBOE about its order books & operations, including trading data & customer identification.

The SEC could then require CBOE to turn that information over.

6/ The SEC says a surveillance-sharing agreement is necessary to satisfy Exchange Act § 6(b)(5), which prohibits the SEC from approving an ETF unless it's designed to “prevent fraudulent and manipulative acts and practices” & “protect investors and the public interest.”

7/ The SEC is basically saying it needs to be able to detect manipulation on the underlying spot & derivative markets where bitcoin is priced to be certain that the ETF itself isn't being manipulated.

Whether that's the correct view is another matter (@HesterPeirce says no).

8/ The SEC's problem is that it doesn't have jurisdiction over crypto exchanges, so it can't force them to provide the information it needs to identify & prosecute manipulation (like spoofing & wash trading).

Also, it can't tell if the exchanges themselves are committing fraud.

9/ The SEC is leveraging its power over the ETF process to fix that problem.

By rejecting bitcoin ETF proposals that don't include surveillance-sharing agreements, the SEC is essentially saying to sponsors: "we can't surveil exchanges on our own, so you'll have to do it for us."

10/ The issue for ETF sponsors is that most crypto exchanges don't really want the SEC looking through their books.

Some are blocking US IP addresses to stay outside SEC jurisdiction. It's hard to imagine those same exchanges agreeing to surveil their clients for the SEC.

11/ Plus, the SEC says it's not good enough to have an agreement with any old exchange: it has to be with "a regulated market of significant size."

However, the SEC hasn't precisely defined that term, so ETF sponsors are left guessing as to which exchanges would be sufficient.

12/ In theory, there are ways to satisfy Exchange Act § 6(b)(5) without entering any surveillance-sharing agreements.

For example, the SEC has said these agreements aren't needed if an ETF sponsor proves that "bitcoin markets are inherently resistant to fraud and manipulation."

13/ The problem with this theory is that the SEC already shot it down in the Winklevoss appeal denial due to "an insufficient basis in the record."

The SEC was looking at an old record from March 2017, though. Maybe things are different now that markets have matured (...or not).

14/ In response to the SEC's grounds for disapproval, both CBOE and SolidX filed comments explaining why the ETF satisfies Exchange Act § 6(b)(5), in addition to rebutting the SEC's other concerns. Read them here:

- CBOE: sec.gov/comments/sr-cb…
- SolidX: sec.gov/comments/sr-cb…

15/ Both CBOE and SolidX make great points about the surveillance-sharing agreements they've entered & the increasing maturity of the bitcoin markets.

They include a particularly good argument about the role of OTC trading, a subject that @gaborgurbacs can tell you more about.

16/ That said, It's hard to be optimistic given recent statements from the SEC.

For example, on CNBC last month, SEC Chairman Jay Clayton said market surveillance is "an issue that needs to be addressed" before he "would be comfortable" approving an ETF.
cnbc.com/2018/11/27/sec…

17/ This leads me to the SEC's most recent delay. What does it mean?

You could take a positive view: if the ETF was doomed to fail, the SEC would've denied it already. Delaying gives the markets more time to develop & CBOE more time to enter new surveillance-sharing agreements.

18/ Or you could take a neutral view: the SEC is under no pressure to make a quick decision. It loses nothing by delaying & appears more thorough & fair by taking all the time allowed by law.

In other words, the delay means nothing. It's just standard operating procedure.

19/ Here's my prediction, with a big disclaimer. *This is not in any way meant as advice.* Don't even think about trading on this. I have no idea how the ETF decision will impact the markets anyway. Okay:

If the deadline were today, I'd give the ETF a 10% chance of approval.

20/ My prediction is based largely on the manipulation issue. I think the chance of ETF approval will go up over time as market structure continues to develop & more surveillance-sharing agreements are entered.

The question is: how high can it go before the February 27 deadline?