Subject: SR-CboeBZX-2019-004
From: Gareth Peters

Mar. 20, 2019

To whom it may concern, 

I would strongly endorse the consideration of this exciting new initiative in the form of a Bitcoin ETF/ETP. 

Therefore, I am writing in regards to the consideration of the Bitcoin ETF. The development of virtual and crypto currencies is an exciting ecosystem that will facilitate the onset of the modern internet of money and a new era for fintech innovation. This is in parallel and not only driven by blockchain technology. One must understand that Crypto currencies provide additional functionalities that are not intrinsic purely in a blockchain architecture perse. 

Whilst it is prudent to take a measured approach, it is, however, the case that many countries have progressed and are deliberating favorably the developments in the ETF space for virtual and crypto currencies, including BTC Bitcoin. I should wish that one of the worlds largest financial markets won't miss this opportunity. 

Below I outline some high-level comments on perspectives and negative sentiment so far received and seek to provide some references to address some of the questions that may assist in education on certain aspects. 

I reference first an overview of how the mathematical equations are fitting into the money creation, supply, and inflation control: see for details 

Bitcoin uses the Hashcash proof of work system. 

Hashcash proofs of work are used in Bitcoin for block generation. In order for a block to be accepted by network participants, miners must complete a proof of work which covers all of the data in the block. The difficulty of this work is adjusted so as to limit the rate at which new blocks can be generated by the network to one every 10 minutes. Due to the very low probability of successful generation, this makes it unpredictable which worker computer in the network will be able to generate the next block. 

The most widely used proof-of-work scheme is based on SHA-256 and was introduced as a part of Bitcoin. Some other hashing algorithms that are used for proof-of-work include Scrypt, Blake-256, CryptoNight, HEFTY1, Quark, SHA-3, scrypt-jane, scrypt-n, and combinations thereof. 

Many papers and studies exist that explain and study the properties of these standard mathematical equations and processes as well as a set of standards referenced below. 

For BTC one should focus on SHA-256 

The SHA (Secure Hash Algorithm) Family designates a family of six different hash functions: SHA-0, SHA-1, SHA-224, SHA-256, SHA-384, and SHA-512. They take variable length input messages and hash them to fixed-length outputs (Blocks). The first four operate on 512-bit message blocks divided into 32-bit words and the last two on 1024-bit blocks divided into 64-bit words. 

Should you wish to know what these mathematical functions are and the algorithmic specification it is easy to find out. See for instance: 

1. National Institute of Standards and Technology (NIST). (1995). FIPS Publication 180-1: Secure Hash Standard. 

2. Clear and simple description of SHA-256 
Gueron, Shay, Simon Johnson, and Jesse Walker. "SHA-512/256." 2011 Eighth International Conference on Information Technology: New Generations. IEEE, 2011. 

3. Bozic, Nikola, Guy Pujolle, and Stefano Secci. "A tutorial on blockchain and applications to secure network control-planes." 2016 3rd Smart Cloud Networks & Systems (SCNS). IEEE, 2016. 

4. Gilbert, Henri, and Helena Handschuh. "Security analysis of SHA-256 and sisters." International workshop on selected areas in cryptography. Springer, Berlin, Heidelberg, 2003. 


This hopefully resolves questions raised regarding the complicated mathematical expressions. Whilst they may be complex - they are certainly well undersood for a long time and widely used not just in BTC settings. 

In regard to value generation, worth or intrinsic value: 

I believe a perspective addressing some of the other comments that related to other respondents such as Sam Anh are partially addressed in the following academic studies undertaken without commercial interest to address questions relating the intrinsic value of crypto currencies such as BTC, see references below. 

* In response to the mechanism of currency creation and inflationary control, total money supply and disbursement. It is well known in the academic and practitioner communities what the protocols are that drive all the virtual currencies whether they be from mining through proof-of-work mechanisms or through staking such as Proof-of-stake or other approaches. 

- the mathematics for these methods and the cryptographic problems that are solved are all classical problems studied for decades with a new and exciting application in the case of virtual currencies to create consensus on transactions without the need for third-party intervention. See papers referenced above for details. 

There is also a simple introductory tutorial available here: 

To simply argue that with the complexity of new innovations such as BTC it is better to remain ignorant and deprive the public of an exciting new financial ecosystem and its financial products and derivatives that it produces is not, in my opinion, an innovative approach. 

As an example to counteract the concern that it is too complex for lay investors. Many in the public won't understand how to price derivatives and yet they are regulatory approved and traded - so why should the approval process for financial produces such as a BTC ETF/ETP be any different to this perspective. 

The onus on understanding is then for the individual to become educated in aspects they wish to understand, which are all classically well known and freely available to read and learn about in the public domain. When it comes to mechanisms such as the protocols and mining processes underpinning BTC. Note there is no secret mathematical formula that is specific to BTC money creation. 

I do think that there is more work to do with KYC in the market participants but this is improving significantly in this space and I also believe that with increase financial maturity through acceptance of such proposals as an ETF for BTC one will enhance regulatory scrutiny to reduce the effect of market manipulation or remove it completely. This is only really possible in illiquid incomplete market settings so growing this market and introducing regulation such as EMIR and MiFID considerations will surely add the required transparency and ultimately reduce the risk to investors. 

With regard to intrinsic value - see the papers below for a detail discussion on aspects of this. 

Peters, Gareth and Panayi, Efstathios and Chapelle, Ariane, Trends in Crypto-Currencies and Blockchain Technologies: A Monetary Theory and Regulation Perspective (August 18, 2015). Available at SSRN: or 

Peters, Gareth and Panayi, Efstathios, Understanding Modern Banking Ledgers Through Blockchain Technologies: Future of Transaction Processing and Smart Contracts on the Internet of Money (November 18, 2015). Available at SSRN: or 

I would also point people who are ill-informed on the works that study the value of BTC and financial instruments derived from it to the following additional references 

Gogerty, Nick and Johnson, Paul, Network Capital: Value of Currency Protocols Bitcoin & SolarCoin Cases in Context (October 2018). Columbia Business School Research Paper No. 19-2. Available at SSRN: or 

Pagnotta, Emiliano and Buraschi, Andrea, An Equilibrium Valuation of Bitcoin and Decentralized Network Assets (March 21, 2018). Available at SSRN: or 

best wishes 
Prof. Gareth W. Peters 


Webpage: Gareth W. Peters QRSLab 

Prof. Dr. Gareth W. Peters (FIOR, YAS-RSE), 
Chair Prof. in Statistics for Risk and Insurance. 
Academic Director Scottish Financial Risk Academy. 
Ph.D. Statistics (by research publication), 

MSc. Cambridge (Statistical Signal Processing), 
MPhil. Cambridge (Statistical Signal Processing), 
BSc (Hons 1st Mathematics and Physics), 
BEng. Electrical (Hons 1st Signal Processing and Wireless Communications). 

Department of Actuarial Mathematics and Statistics, 

Heriot-Watt University, Edinburgh, UK 


1. Young Academy of Science, Royal Society of Edinburgh Elected Fellow 2018-2022 
2. Fellow of the Institute of Operational Risk 2017+ 
3. Visiting Fellow of Alan Turing Institute, London, UK 2018+ 
4. Honorary Professor of Statistics, University College London, UK. 

5. Associate Member of Oxford-Man Institute 

Oxford University, Oxford, UK 
6. Associate Member of Systemic Risk Center, 
London School of Economics, UK 
7. Core Member of Center for Statistics (CfS), University of Edinburgh, UK. 
8. Affiliated Professor, Department of Mathematics and Statistics, 
University of New South Wales, Sydney, Australia. 
9. Honorary Professor University of Sydney, Australia 

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