October 29, 2018
Dear SEC Staff:
Although in general I am a supporter of the concept of a bitcoin ETF being listed in the US at this time, I think there are three obvious flaws with the Van Eck SolidX proposal.
The first is the use of a non-transparent methodology for setting the NAV by asking for quotes from OTC desks. Not only is this using a non-public source to price the ETF's shares, when dozens of large screen-based exchanges exist as well as at least two futures exchanges, but it certainly raises the issue of if this OTC desk arrangement could fall prey to the same problems as plagued LIBOR. That is the OTC desks could use the knowledge of the level at which they made non-binding price quotes to an ETF when they in turn make their own markets or execute their own trades. What is more Van Eck has made no attempt to show that these promised OTC prices bear any relationship to the prevailing global price of bitcoin, nor shown how they arrived at their claimed level of daily volume of the OTC desks.
There is of course a second related issue of exactly which OTC desks will even agree to both provide a daily mark AND agree to allow the listing stock exchange to inspect their records as part of a surveillance agreement. It is hard to believe that many will actually do this no matter what Van Eck suggests.
The second problem is the notion that the coins themselves will be held in self-custody. This of course turns its back on almost 80 years of regulation of US fund products in the US using unrelated 3rd parties. It almost might be acceptable if Van Eck claimed the 3rd party custody was not available. However that is not the case. A number of regulated entities (banks, trust companies, broker/dealers etc.), offer 3rd party custody in the US and Europe. The truth is that Van Eck may just not want to pay the current going rate for such custody, but that is not a reason for the SEC to find their proposal acceptable. Of course they might argue that they will obtain insurance to cover potential losses, but until the SEC decides that insurance is the same as 3rd party custody, for not only this ETF but for all ETFs and mutual funds, this just seems a bad idea.
Finally they put forth what can only be called a gimmick in that they proposed to price the NAV at such a high level out of the gate, $200,000 a share, that it would preclude retail from owning it and so the SEC does not need to worry about "Joe Sixpack" buying the shares. Leaving aside that their prospectus allows them to do a subsequent stock-split any time they like, and leaving aside the reality that retail can still end up owning shares in this ETF if they invest through an advisor who commingles client's funds and thus can assign even a small retail investor a portion of a share, this raises a more fundamental question. If in fact Van Eck only plans to sell to institutions why do they need this as an exchange listed product in the first place?
Van Eck should get credit for tying to be creative with their product design after no doubt seeing the issues raised with the rejection of the Winklevoss ETF. But being creative is not the same as saying you have solved the problems.
Of course the Winklevoss filing was notably flawed on two counts. The first is the fact that they propose to price it using prices from one very small exchange that was a related entity (raising question of both how representative the exchange' price is of the general price of bitcoin as well as concerns about self-dealing),and also proposing to have the related entity hold the coins (once again no unrelated 3rd party custody).
However on balance the Van Eck proposal seems, if anything, even more badly flawed and should not at this stage be allowed to go effective.