May 16, 2017
Here are some areas which I believe should be disclosed before any given blockchain asset is entered into an ETF, along with the rationales for each. I suggest that a template is developed which can be filled out by an applicant, to make this process go smoother.
1) Geographical distribution of mining power.
Concentration / centralization are major risks if the security model of an asset is derived from decentralization. For example, much of bitcoin is mined in China, due to a cheaper cost structure. The world's largest Bitcoin/Ether mining farm is in China. Too much concentration within a specific country or organization (such as a mining pool) could render the network vulnerable to a single political or business decision.
2) Governance models.
It's essential that we understand the governance model. For example, who makes decisions on hard forks? See discussion in point 3) below. This will also help the SEC define whether an asset is truly a 'digital asset' or a security.
3) Scalability and fees.
A recent histogram of latency and throughput are key to understanding whether the existing infrastructure and mechanics are capable of supporting the considerable liquidity which will come from ETF activities. Anyone following bitcoin for example, is aware that transactions are getting 'stuck', sometimes for hours. Generally speaking, the less scalable a network is, the higher fees necessary to un-stick transactions. These dynamics can negatively affect the value of the ETF (higher fees and prices paid).
3) Hard forks: history, risks and motivations going forward.
Ethereum has already undergone multiple hard forks. The hard fork which fixed a bug that led to the DAO collapse was extremely contentious and showed what the real governance model of etherium is as reported, 65% of miners voted against the hard fork, yet their opinions were over-ruled link: https://news.bitcoin.com/ethereum-hard-fork-miner-vote-overturned/ . Many believed this particular fork undermined principles of the ethereum system. Thus it's very important to have disclosure of the history of hard forks, as well as current plans of upcoming forks and an assessment of known/perceived risks/motivations for further forks (across the community). It's hard to believe that an asset which has not stabilized in terms of forks is ready for introduction into an ETF.
Obviously these kinds of assets will have volatility. But I believe a maximum level should be set for volatility of a given asset before it is allowed as an underlying in an ETF. Let the asset prove itself to be relative stable before introduction.
5) Security model and resiliency to attacks assumptions.
A disclosure of the security model is needed, including thresholds and assumptions. For example, if the security model can tolerate 1/3 of the nodes being bad and 1/2 of the nodes are within a particular geography or within the purview of a single organization, then obviously the risk is heightened.