From: Jorge Stolfi
Sent: July 13, 2016
Subject: Re: File Number SR-BatsBZX-2016-30

Dear Sir/Madam:

I am not a US citizen, but the proposed ETF has a global impact, given its connection to Bitcoin -- a venture that is intrinsically international in scope. Bitcoin is being itself traded and advertised as an investment instrument, the world over; and the proposed ETF would legitimize it even in my country. So, please let me offer my comment about that proposal.

For the purpose of the fund, bitcoin is being characterized as a commodity. However, bitcoins do not really exist. They do not have material existence, of course; but they don't have even the virtual existence of MP3 or video files.

The latter are specific patterns of bits, that can be "owned" in the broad sense of the DCMA and other "intellectual property" legislation. Bitcoins are not specific patterns of bits, however. One cannot display them on a screen, print them, play them on a speaker -- as one can do with other forms of intellectual property.

In that respect, bitcoins are similar to the money in a bank account. The bank client cannot see his money, either. All he can do is see a ledger entry that states that he has a certain amount in his account. Likewise, he cannot display his bitcoins, but only see a ledger entry -- in the "blockchain" -- that states that he owns a certain amount of bitcoins.

There are important differences, however. A bank is bound by contract and by law to transfer the amount stated in that ledger to other banks, or to cash, if the client requests it; and the government is morally obliged to preserve the purchase value of that cash, to a reasonable degree. But there are no legal, contractual, or moral obligations about bitcoin transfer or conversion to other money instruments; and there is no entity tasked with preserving its value.

Thus, bitcoins are more like "penny stock", shares of a company with no assets, no products, and no staff; or shares in a pure ponzi schema, like Madoff's fund. The value of bitcoin is supposed to come only from the existence of an
(allegedly) secure ledger that records the distribution of coins among numerous accounts ("addresses" in the system's terminology), and therefore allows their use as a means for internet payments. But penny stocks and ponzi funds offer that capability, too.

Another important difference between bitcoin and other assets, real or virtual, is that the ledger (blockchain) does not really establish ownership of the bitcoins to identified individuals. The bitcoins are assigned to "addresses" (accounts) that are identified by numbers, and can be moved anonymously by using "private keys" associated to the addresses.

Anyone who knows the private key of an address can move the bitcoins stored there. By design, there is no identity verification, not even the possibility of it. In that regard, bitcoin accounts in the blockchain are like the old numbered accounts in Swiss banks. As the case of the MtGox exchange showed, when btcoins are stolen, it is nearly impossible to identif the thief, or even to determine whether it was an outside or inside job.  This feature creates a security risk that is impossible to quantify.

Since 2010 or so, bitcoin has been heavily used for for investment and speculative trading, more than as a currency or payment network. All that trade has been occurring in totally unregulated exchanges that are not subjected to any meaningful auditing.

The market price of bitcoin, like that of a penny stock or ponzi fund, is entirely speculative, based on expectations of traders about future prices, which will be based on expectations of future expectations...

Unlike legitimate stocks and bounds, that infinite regression is not ultimately grounded on fundamentals -- because bitcoin does not have any. In fact, its primary use as speculative financial instrument causes extreme price volatility, that prevents its use as a currency.

Ownership of bitcoins does not yield any dividends or interest. While eventual users of bitcoin as a currency would be required to pay transaction fees, those fees will not be paid to bitcoin holders, but to the "miners" that maintain the public ledger.

The only way to make a profit by investing in bitcoins is by selling them to other investors, for more than their purchase price. Thus, bitcoin has the essential character of a penny stock, or a pyramid schema: the profit of early investors comes entirely from the investment of later ones.

Investment in bitcoin does not contribute to mankind's real wealth or well-being: it does not finance the creation of any material goods or real services. On the other hand, it has ruined many naive investors who have been induced to put their savings into it, by spurious promises of fantastic price increases in some undefined future.

In my view, since it is primarily used for investment, bitcoin should be regulated like a security; in which case it would probably get from the regulators the same treatment that a penny stock or ponzi fund would get.

As for the proposed ETF, it does not add any productive mechanism to the underlying bitcoins. It only provides a level of indirection, that is intended to make bitcoin accessible to investments funds that it would not otherwise get (such as retirement funds). But, would the SEC authorize an ETF whose shares are to be backed exclusively by shares of a specific penny stock?

I hope you will consider these points when deciding on whether to authorize the ETF.

Thank you for your attention,


PS. Another minor problem with the proposal is that the nominal price of the shares is supposed to be tied to the market price of bitcoin at the Gemini exchange. That exchange is closely tied to the ETF proponents, and has relatively low liquidity and trade volume. There seems to be a significant risk that the nominal ETF share price will be manipulated, by relatively small trades that manipulate the bitcoin price at that exchange.

Jorge Stolfi
Full Professor/Professor Titular
Instituto de Computação/Institute of Computing UNICAMP