Cboe Global Markets President Supports Crypto ETFs in Letter to SEC
In a letter sent to the Securities and Exchange Commission (SEC) on Monday, Cboe Global Markets President and COO Chris Concannon addressed an SEC staff letter written by Dalia Blass in January, which questioned whether current issues in the cryptocurrency markets would preclude digital currencies from serving as a solid basis for electronically traded funds or products (ETFs or ETPs).
In response to the SEC’s concerns about crypto ETFs, which mainly revolve around liquidity, valuations, custody and arbitrage, Concannon offered an explanation to why Cboe believes they can successfully offer investors ETPs based on cryptocurrency markets.
Here are the most interesting bits from the Cboe letter:
“While there are certain attributes unique to cryptocurrency that need to be addressed by each Cryptocurrency ETP’s respective valuation policy such as forks and air drops,9 most valuation issues are either very similar or identical to those encountered in valuing other assets. Even forks and air drops can easily be accommodated for with proper policies and procedures in place, as has been done with the bitcoin futures contracts.”
“For bitcoin in particular, there are numerous robust indices that Cboe and other market participants have been tracking for years.”
“While there are certain aspects that differentiate cryptocurrency-related assets from more traditional assets, almost all of the issues related to liquidity are substantively identical to those of other commodities, including the spot, over-the-counter, and commodity futures markets. Liquidity evaluations for commodities have historically been and for cryptocurrency-related holdings should continue to be made on a case by case basis in a manner very similar to the analysis traditionally applied to other commodities.”
“As the volumes continue to grow, especially on regulated U.S. markets, the overall spot bitcoin market looks more and more like a traditional commodity market and Cboe continues to believe that the spot market is sufficiently liquid to support a bitcoin ETP.”
“For Cryptocurrency ETPs based on cash settled futures contracts, Cboe believes that there are no policy issues that would warrant disparate treatment between such futures contracts and other commodity futures contracts that are used in other ETPs.”
“While Cboe does agree that custody of cryptocurrency can raise unique security issues as compared to other commodities, we suggest that the Commission either rely on the determinations of other regulators (such as the New York State Department of Financial Services in the case of Gemini) or provide detailed standards for all custodial services for all asset types.”
“Based on a number of factors, including conversations with market makers and authorized participants, Cboe believes that the spot and over-the-counter bitcoin market could easily support the arbitrage mechanism for an ETP.”
“The overlap between the participants in the U.S. equities markets and the cryptocurrency markets grows each day.”
“The arbitrage mechanism for a bitcoin ETP would function identically to other commodity-related ETPs, providing market participants with strong economic incentive to take advantage of arbitrage opportunities in, thereby keeping the price of the ETP in line with the price of bitcoin.”
Essentially, Concannon argues that digital assets aren’t notably different than traditional commodities and currencies, which are represented by a variety of ETPs and often trade on far more fragmented markets than cryptocurrencies. He also pointed to crypto’s rapid growth in both spot markets and futures as signals that bitcoin is ready to serve as the basis for ETPs.
At least 10 bitcoin ETFs are currently waiting for SEC approval and Cboe filed 6 of them, including several inverse and short-based products.