Get Real or Get Outta Town. Reality Shares Gets a Dose of Reality
February 18, 2019 by Paul de Havilland
When a February 11th bitcoin ETF product submitted to the SEC by Reality Shares gets a dose of reality within 24 hours, you know there must be something up with the proposal. The SEC disliked the look of the Cayman Islands-based Blockforce Capital subsidiary’s submission so much that it shunned it almost immediately, requesting a withdrawal.
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Realty Shares Gets a Dose of Reality… Courtesy of the SEC
The SEC has rejected and postponed decisions on a number of rule changes made to accommodate bitcoin ETF proposals over the past year and is likely to continue doing so until it is satisfied that market conditions are appropriate and manipulation possibilities excluded.
The Winklevii were the first to get the double rejection in July of last year, because, among other things, the regulator requires:
“…that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices [and] to protect investors and the public interest.”
The application by Bats BZX Exchange to list the Winklevoss Bitcoin Trust ETFs on its exchange, in reality, was unrealistic insofar as it was lacking in sophistication. Unperturbed, the twins set about creating what is colloquially known as the Winklevii buck, a New York regulated stablecoin. (Because clearly the crypto world needs more stablecoins.)
VanEck Still the Most Solid of Proposals
The CBOE BZX Exchange, Inc.’s proposed rule change to allow it to list VanEck SolidX Bitcoin Shares was withdrawn during the recent government shutdown, after a postponement in August last year. At the time, Vaneck CEO Jan van Eck clarified that:
“The SEC is affected by the shutdown. So, we were engaged in discussions with the SEC about the bitcoin-related issues — custody, market manipulation, prices. And, that has to stop … We had the application pulled and we will refile and re-engage in the discussions when the SEC gets going again.”
The proposal was resubmitted earlier this month. The ace up VanEck’s sleeve is that it is a fund that deliberately excludes participation by mom-and-pop investors, with a proposed listing price of roughly $200,000 USD per share. The SEC’s job is to protect Americans, and they are particularly wary of protecting less sophisticated investors. As Commissioner Jackson Jnr. recently stated:
“Getting the stamp of approval from the deepest and most liquid capital markets in the world is hard, and it should be. Once we make it available to everyday mom and pop investors, we are taking risks that Americans can get hurt.”
Putting Their Foot Down on Serious
The commission’s immediate withdrawal request of Realty Shares is another step altogether. The product was a mixture of sovereign debt instruments and bitcoin futures. Their proposal was to list their ETFs on NYSE Arca. It included bitcoin futures traded on the Cboe and Chicago Mercantile Mutual exchanges, sovereign debt, and money market funds. The proposal reads:
“The Fund expects to obtain exposure to Bitcoin Futures by investing up to 25% of its total assets, as measured at the end of every quarter of the Fund’s taxable year, in a wholly-owned and controlled Cayman Islands subsidiary. However, the Adviser will seek to limit the Subsidiary’s investment in Bitcoin Futures, so the Fund’s aggregate notional exposure to Bitcoin Futures is limited to 15% of the Fund’s net assets at the time of investment.”
The difference between it and other proposals was that its exposure to bitcoin was only 15 percent and it was submitted as a 1940 Act fund, using rule 485(a). That range of obscure mechanisms to bypass SEC concerns only served to raise them. The frosty reception can be boiled down to one aspect of their proposal the SEC pointed out:
“To the extent a fund plans to hold cryptocurrency directly, how would it satisfy the custody requirements of the 1940 Act and relevant rules?”
Yeah! Got an answer to that, Mr and Mrs Reality?
Reality Shares Gets a Dose of Reality They Probably Deserved
The Reality Shares proposal was unrealistic and the filers foolhardy to submit the application to the regulator. So, in true Jay Clayton fashion, Reality Shares gets a dose of reality and another bitcoin EFT product bites the dust.
If bitcoin is to enter the ETF arena, appropriate models have been presented by the likes of VanEck for others to follow. Clayton and co are unlikely to fall for too much razzle dazzle.
Sound off below. When Reality Shares gets a dose of reality like it did, do you wonder if a crypto ETF will ever get approved?
Images via Pixabay
