Winklevoss Bitcoin Trust: Not Rejected. Just Inadequate.

Winklevoss Bitcoin Trust: Not Rejected. Just Inadequate.

The Securities Exchange Commission didn’t “reject” or “disapprove” the Winklevoss Bitcoin Trust. That’s not what the SEC does. They just didn’t believe that the registration statement, as amended for the ninth time, contained a full and fair disclosure and therefore did not declare it “effective”. Meaning it took no further action notifying the issuer that they had no additional comments.

So what’s the difference? Keep reading.

Full and fair disclosure is highly subjective. If an issuer grows and sells bananas (or marijuana) and files a S-1 registration statement offering its shares to the public, the SEC wants the issuer to disclose all aspects of the financial and operating condition of the company, audited financial statements, a statement about its management and experience and the nature of the industry it operates in as well as all the risks that the company can quantify about the company, the weather, soil quality, distribution competition, etc. Sounds fair. Right?

The problem with the proposed ETF is the nature of the singularity of the asset in question. You can’t eat Bitcoin. It’s not a currency or a security. It’s not a commodity. What is it?

The SEC is taking the position that Bitcoin; the only asset that the ETF proposes to “hold in trust” for the benefit of investors in the ETF itself, has no transparent or regulated market.

Bitcoin exchanges are not regulated and are not federally compelled to cooperate in consolidating market and trade pricing data in the way most other exchanges that trade assets do. Its not centrally cleared; one of the more positive features of its nature as it is cleared by the Bitcoin Blockchain, a constellation of algorithmic consensus based voluntary computing power. It’s a “dark” market.

In order to get this ETF registration statement “declared effective by the SEC, the Winklevoss twins would have to compel the bulk of exchanges that dominate trading volume to subject themselves to regulatory oversight. How do you do that? Well, the first step is to convince the exchanges to enter into cooperative surveillance agreements, adopt compliance and procedures manuals that describe, in highly explicit detail, how orders will be handled, routed, displayed and executed. How will all exchanges cooperate to consolidate the “confines” of bid/ask data. How will exchanges assure enforcement of fair and orderly markets and place priority on the reporting of all market data to a consolidated repository for all investors to discover? And that’s only about 5% of the obligations they would have to undertake AND document.

What the Winklevi would essentially be asking is for all exchanges to give up those profitable spreads; give up their ability to hide liquidity when convenient, stimulate liquidity when convenient and basically give up everything they depend on that made it attractive to trade Bitcoin in favor of the possibility that increased volume will make up lost profits and all the while, subjecting themselves to sometimes ex-constitutional regulation. We all know how that worked out. Just ask the market makers of equities like Knight Securities and UBS.

No. The only way any registration statement of any ETF trading solely in Bitcoin gets declared effective by the SEC is to convince all exchanges trading in Bitcoin to actually become exchanges, as that term is defined by the SEC.

If Bitcoin could talk, you know what most of the exchanges would say on its behalf? Fork you!

Jason Meyers is the Founder of Vestcomp Ventures.