Bitwise Investments Chief Investment Officer Matt Hougan expressed skepticism about including surveillance sharing agreements in spot Bitcoin ETF proposals from rival firms. He noted that while these agreements appear to be robust, they may not necessarily serve as a surefire path to regulatory approval.
To prove that the Bitcoin futures market is a leader in price discovery over the spot market and is a “regulated market of significant size,” the company on Monday added more than 40 pages of research rebutting the U.S – Securities and Exchange Commission has made various Bitcoin ETF filings over the years.
The amended filing, filed by the NYSE Arca Exchange on behalf of Bitwise’s proposed Bitcoin ETF, comes nearly a month after Grayscale’s legal victory against the SEC in the DC Circuit Court of Appeals.
The judges in the case said the regulator’s approval of Bitcoin futures ETFs, but not the conversion of the Grayscale Bitcoin Trust (GBTC) into an ETF, was “arbitrary and capricious.”
Bitwise specifically noted in its amended filing on Monday that the SEC is allowing two Bitcoin futures ETFs filed under the Securities Act of 1933 to come to market in 2022.
“In approving the applications, the Commission concluded that the CME’s supervision could reasonably be relied upon to capture the impact on the CME Bitcoin futures market caused by a person attempting to “manipulating the proposed futures ETP by manipulating the price of CME Bitcoin,” the filing states.
Read more: The SEC’s ruling on Teucrium’s Bitcoin futures ETF could impact spot funds
“While the Commission rejected the view that this logic extended to the detection of Bitcoin ETPs, this view was recently rejected by the Court of Appeals for the D.C. Circuit,” she adds.
But the SEC may still decide to appeal the D.C. Circuit Court of Appeals decision, Bitwise’s Hougan noted in an X post on Monday.
Proposed issuers of spot Bitcoin ETFs, he added, must demonstrate that the CME Bitcoin futures market is a leader in price discovery over the spot market and be a “regulated market of significant size” for monitoring purposes.
“Unfortunately, the existing materials do not contain any substantively new arguments or research that directly address this question,” Hougan said in the X thread. “Surveillance sharing arrangements with spot exchanges are positive, but may not meet technical regulatory requirements.”
Would-be Bitcoin ETF proposal exchanges BlackRock, Fidelity and others have noted in their filings that they have “reached agreement on terms” with Coinbase to enter into a surveillance sharing agreement.
A lawyer representing Grayscale said in a July letter to the SEC that the company does not believe a monitoring agreement with a Bitcoin spot market should be a “magic bullet” for approval of Bitcoin ETFs.
Cryptocurrency investment firm Skybridge Capital countered that argument in its own letter to the SEC last month, arguing that such a deal with Coinbase “appropriately addresses” the SEC’s concerns about market manipulation.
Defense of previous research results
Bitwise’s latest attempt to launch a spot Bitcoin ETF comes after two previous attempts. The SEC has never allowed such a product from an issuer to come to market.
“In particular, we seek to clear up much of the confusion surrounding the growing body of academic literature on price discovery in the Bitcoin market and show that every well-designed academic study supports the finding that the CME is ‘significant,’” Hougan noted in X thread about Bitwise’s latest submission.
The company had filed a 100-plus page white paper in October 2021 stating that the CME Bitcoin futures market leads the spot market and the unregulated Bitcoin futures market.
The sponsor also submitted a 24-page white paper indicating that a new Bitcoin ETP is unlikely to have a significant impact on CME Bitcoin futures market prices.
Monday’s amended filing addresses eight disagreements the SEC had with Bitwise research included in its previous Bitcoin ETF application – including what it called a “mixed” or “inconclusive” academic record regarding the lead-lag relationship between spot and futures markets, according to the regulators.
Bitwise argues that there is actually “a high degree of consensus” between various studies that show the CME futures market leading the spot market.
“No single statistical study can answer every question, account for every variable, or use every statistical approach for a given problem,” Monday’s filing said. “[Bitwise] designed his study – developed in a series of 14 meetings with the [SEC] Collaborators – to add to the broader academic literature addressing price discovery in the Bitcoin market.
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