From: Rodger Delehanty
Sent: October 14, 2016
Subject: File Number SR-BatsBZX-2016-30

To whom it may concern,

I would like to offer my thoughts as a financial services professional with an interest in cryptocurrencies regarding the proposed ETP which would have Bitcoin as an underlying asset.  In order of the points on which you seek comment:

1. It is true that bitcoin represents an entirely new and different form of asset than those on which ETPs have to date been based.  While much of the investment community are aware of what bitcoin is, and the potential of the blockchain technology in a high level sense, few possess the technical acumen to understand it on a foundational level or have the skills to safely purchase such assets and secure them.   Indeed, as you have alluded to, this is a non-trivial task – with some of the exchanges on which bitcoin trades having had their security flaws exploited and some of their bitcoins stolen in the last number of years.  

However, it is important to note that in the early years of a fledgling technology these exchanges have had the culture of start-ups- not the professional approach one would expect from a regulated securities exchange.   Handled properly, by competent and honest persons the proposed solution of using an air-gapped cold storage system would be immune to the type of security vulnerabilities that hackers have exploited to steal bitcoins to date. As such, the proposed ETP would provide an avenue for the less technically savvy investor to gain exposure to the underlying asset without having to learn the necessary computer skills to secure their private keys themselves. One can think of a simple analogy of an investor purchasing a gold ETP without having to worry about the security or storage of the underlying asset. As such, it seems to me that bitcoin represents a very natural fit for an ETP.

Concerning the stability, resilience, fairness, and efficiency of the markets on which bitcoin trades:  This is very much an evolving space, which has progressed enormously in recent times.  As you pointed out, a little over 3 years ago much of bitcoin’s trading was centred on one exchange (known as Mt.Gox) however now I can see that there are numerous exchanges based in different countries and on today’s volume (13/10/16) none seems to have more than 7% of the overall.   (Source:  With the trading being spread across multiple exchanges this vastly enhances the anti-fragility and resilience of the bitcoin ecosystem. Indeed, the price of bitcoin across all these exchanges currently falls within a $6 range or about 1% of the current value. This represents a large increase in market efficiency which is to be expected as the markets have matured and arbitrageurs have been able to take advantage of any significant discrepancy between the exchanges.  

However, with the exchanges spread across different jurisdictions and with wildly varying amounts of regulatory oversight there is still scope for repeats of the Mt Gox debacle although no single such event could affect bitcoin in the same way now as it is unlikely that any one exchange will ever host such a large percentage of the trading again. 

Concerning is bitcoin an appropriate underlying asset for a product on a national securities exchange:  A previous commenter noted that he believed the market price of bitcoin to be entirely speculative and like a Ponzi scheme.   While he is correct in that a large proportion of the market cap is likely due to speculators, in my opinion this is down to those people believing the underlying technology will ultimately prove extremely useful and the demand for the asset will rise.  Indeed, the media attention surrounding bitcoin and blockchain in the last number of years has largely focused on the (as yet untapped) potential of this technology which could prove to be transformative.  Perhaps this potential will never be realised and the market capitalization of bitcoin will shrink to a fraction of what it is now.  Even in such a scenario the commenter would be entirely incorrect in his classification of bitcoin as a Ponzi scheme.  Purchasing assets based on estimations of their future potential is absolutely fundamental to the nature of capital markets.  I also disagree with his characterisation that the ETP does not add any productive mechanism to the underlying bitcoins as it just makes them available to investment funds.   Were the price of the underlying to rise due to the creation of the ETP this would incentivise further development of apps / companies in the bitcoin space potentially creating a virtuous cycle for this niche area of the economy.

My main concern regarding bitcoin as an underlying to an ETP is that the proposal should specify what occurs in the case of a “hard fork” in the bitcoin blockchain -as has recently occurred in the Ethereum blockchain.   For example, were two separate blockchains to emerge as a result of a lack of consensus on the bitcoin protocol (which may be the outcome of the current debate regarding the protocol’s blocksize parameter) the proposal should specify what the ETP will track in that case.  In such a scenario each underlying bitcoin would become worth 1 new coin in each of the two resultant coins,  Will the ETP track the sum of their value?  Will it track one, sell all holdings of the other and distribute the proceedings to ETP holders? If it tracks one which will it track, and who and how will such a decision be made?  I do not believe this property of bitcoin to evolve should prevent an ETP from being based on it,  but clear rules as to what will happen in such scenarios should be set out beforehand.

Concerning the susceptibility to manipulation:  This ties in to items for comment 2&3 &5 as exchanges other than Gemini are not subject to the same oversight , were the ETP to be based on some broad measure of weighted prices across different exchanges then completely unregulated actors may be able to exercise undue influence on the ETP valuation price.   As such, it makes sense that the valuation be based on an auction (to guarantee sufficient liquidity) and on the Gemini exchange.  However, this is not without a downside as the Gemini exchange is an affiliate of the sponsor and this creates the potential for conflicts of interest. 

4.  I agree with the commenters suggestions regarding “proof of control”. It should not be an undue burden to produce this on regular (weekly or monthly) basis.  Multi sig protocols make sense to not give a single actor the ability to sign transactions from the underlying accounts. Clarity on what is intended by “M of N” signatures would be helpful particularly regarding the minimum number of signatures to release bitcoins.  
Concerning insurance:  If handled properly, with thorough procedures -this does not seem to me to be an absolute necessity. It would be nice to have, though this may increase the running costs of the ETP significantly and that cost would be passed to the end user.  

5.  I believe this is a legitimate concern, although it is not uncommon to see a very small amount of physical trades determine the base price for a much larger paper market — (for example Brent Crude) .    As mentioned above I believe there is an inherent trade-off to using one exchange versus an average of several exchanges some of which may be less scrupulous.  The volume in the recent Gemini bitcoin daily auctions seems  ( to be of reasonable size with frequently over $1m USD worth crossing.  It is also a reasonable assumption that average volumes in this auction would increase should the ETP be listed.

6.  I agree with the assertion that the Authorized Participants and markets will be able to make efficient and liquid markets roughly in line with the NAV.  I would also note there are already ETPs that grant exposure to currencies and assets far less liquid than bitcoin.  

In summation,  on balance I believe the proposed ETP to be a very good idea.  Though, further clarity regarding processes as outlined in the points above would make for a more thorough application. 

Kind regards,

Rodger Delehanty CFA