VanEck SolidX Bitcoin Trust
Presentation for SEC Staff
1.Reasons delineated in March 2017 disapproval
COMMISSION DETERMINED IN MARCH 2017 THE PROPOSED RULE CHANGE WAS NOT CONSISTENT WITH SECTION 6(b)(5) OF THE SECURITIES EXCHANGE ACT
Commission noted that for commodity-trust ETPs approved to date, there have been well-established, significant, regulated markets for trading futures on the underlying commodity
• Examples: gold, silver, platinum, palladium, and copper
• The ETP-listing exchange had entered into surveillance-sharing agreements with those marketsCommission observed, however, that significant markets for bitcoin were unregulated as of March 2017
• Listing exchange unable to enter into surveillance-sharing agreements with those markets
• The agreements help ensure availability of information necessary to detect and deter potential manipulations and other trading abuses
COMMISSION DETERMINED THE PROPOSED RULE CHANGE WAS NOT CONSISTENT WITH SECTION 6(b)(5) (CONT’D)
“The Commission continues to believe that surveillance-sharing agreements between the exchange listing shares of a commodity-trust ETP and significant, regulated markets related to the underlying asset provide a ‘necessary deterrent to manipulation’”
“The Commission notes that bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop. Should such markets develop, the Commission could consider whether a bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act”
2.Significant changes in product, market structure and overall circumstances since March 2017 disapproval
CHANGE 1 – MARKET STRUCTURE: MULTIPLE DERIVATIVES MARKETS NOW EXIST FOR BITCOIN
Derivatives markets:
- CME bitcoin futures
- Cboe bitcoin futures
- LedgerX bitcoin swaps and options contracts
- Cantor Exchange self-certified bitcoin swaps contract
All of the above are markets regulated by the CFTC and all are cleared products
Combined daily trading volume on CME and Cboe Futures Exchange is approximately $150 - $200 million
CHANGE 2 – PRODUCT PRICING
Trust will use OTC index for pricing and NAV
• OTC index is based on the mid-point of firm bid/ask quotes provided by constituent OTC platforms
• OTC desk prices are not subject to manipulation in the absence of misconduct by the trading desks themselves
• Constituent OTC index platforms will enter into information sharing agreements with Cboe
• OTC desks trade with institutional and sophisticated investors and follow AML, KYC and BSA regulations, among others
• Trades in OTC market are principal-to-principal, desks and trades are identifiable and accountable to regulators
• CFTC has jurisdiction over OTC bitcoin trading
Potential manipulative activity would be identified immediately, providing the “necessary deterrent to manipulation" described in the March 2017 disapproval notice
CFTC HAS JURISDICTION OVER OTC BITCOIN MARKET
The CFTC’s jurisdiction is implicated when a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce, which extends to bitcoin exchanges and the
OTC market
As reported by CFTC Chairman J. Christopher Giancarlo before the Committee on Banking, Housing and Urban Affairs, the CFTC can now obtain trading data and analyze it for fraud and manipulation in five underlying spot markets
Section 2(c)(2)(D) of the CEA grants the CFTC oversight authority over any transaction in a commodity (including virtual currencies) that is entered into with or offered to a person who is not an eligible contract participant or eligible commercial entity (a “retail customer”)
CHANGE 3 – MARKET STRUCTURE: PROLIFERATION OF INFORMATION
SHARING AGREEMENTS THAT WERE NOT IN PLACE IN MARCH 2017
Information Sharing Agreements already in place / being established
CME is an ISG member – Cboe can obtain information from CME
ISA in place with Gemini, a US-based bitcoin spot market
ISAs in process with other USD-bitcoin spot markets
ISAs will be established between OTC bitcoin trading desks and Cboe
CHANGE 4 – PRODUCT STRUCUTURE: OVERTLY NOT FOR RETAIL
Outside of the context of the disapproval notice from March 2017, the SEC has indicated concerns regarding bitcoin ETFs and retail investors
To address those concerns, the initial share price will be set at a level designed to ensure that only institutional and “non-retail” investors will be able to purchase shares
$203,750 share price
(25 bitcoin x $8,150 as of July 30)
3.Bitcoin in the context of Section 6(b)(5) of the SEA
SECTION 6(b)(5) OF THE SECURITIES EXCHANGE ACT PROVIDES THE CRITERIA FOR APPROVAL
Section 6(b)(5) of the Exchange Act:
The rules of the exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, or to regulate by virtue of any authority conferred by this chapter matters not related to the purposes of this chapter or the administration of the exchange
The Trust provides investors with the virtues of the above criteria in a manner not offered by direct investment in bitcoin
DIRECT INVESTMENT IN BITCOIN CREATES RISKS FOR INVESTORS
Direct investment in bitcoin:
Traditional capital markets infrastructure is not capable of handling
No clearing whatsoever. Complete counterparty risk in purchases and sales of bitcoin
Additional counterparty risk if purchaser chooses to store bitcoin with a third-party provider
Operational risks from self-storage: hacking, computer error, etc.
These issues make bitcoin completely inaccessible to most institutional investors, leaving the market largely to retail investors
All of the above run counter to the letter and the spirit of Section 6(b)(5)
LANDSCAPE OF EXISTING VEHICLES DOES NOT PROVIDE INVESTORS WITH SUFFICIENT PROTECTION
GBTC
In essence, a closed-end fund because creations/redemptions are not possible
Trades on the pink sheets in the US
Can be purchased in most brokerage accounts
Has traded as high as a 75% premium to the price of bitcoin
Minimal liquidity
Complete operational risk
No insurance
GBTC has a market cap of approximately $2 billion
XBT Provider
Exchage Traded Note, a debt instrument that trades on Nasdaq OMX in Sweden
Can be purchased in may US brokerage accounts
Issuing entity has no balance sheet
investors are exposed to severe credit risk
Original issuer went bankrupt - investeors were bailed out by an acquiring entity
The credit risk pervents institutions from participating
Compelete operational risk
No insurance
XBT Provider has amassed AUM of approximately $2 billion
BITCOIN IS UNLIKE ANY OTHER DIGITAL ASSET AND VANECK SOLIDX BITCOIN TRUST IS STRUCTURED METICULOUSLY TO ADDRESS THE SEC’S CONCERNS
Bitcoin is unlike any other digital asset
Secure and stable open source system
Nine year trading history with meaningful price transparency
Truly decentralized, no founder team in control •
Not an ICO
Deemed commodity by CFTC, no ambiguity
Trades USD billions daily
Established futures market
Significant investment, including by VCs, in bitcoin ecosystem
VanEck SolidX Bitcoin Trust is constructed to promote investor protection
Insurance on underlying bitcoin – a crucial feature
Transparent pricing and accountability via OTC index
Cash and in-kind creations and redemptions
Structured for institutional investors
VanEck is an established ETP issuer
Decades of industry experience
More than 70 funds
Approximately $46 billion in AUM
By approving the VanEck SolidX Bitcoin Trust, SEC would:
Set high bar for other ETPs tied to digital assets
Promote investor protection, per section 6(b)(5)
VANECK SOLIDX BITCOIN TRUST SHOULD BE APPROVED
Issues identified in disapproval order have been resolved
Bitcoin markets (e.g., OTC and futures) not “unregulated”
OTC index is based on institutional principal-to-principal trading
Concerns around price manipulation have been mitigated, consistent with approval of prior commodity-based ETPs
There now exists a significant regulated derivatives market for bitcoin
Not for retail: share price is for institutional investors
4.Notes on January 18, 2018 Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings
STAFF LETTER ISSUE NO. 1 – POTENTIAL PRICE MANIPULATION
Investor protection should not be less than in securities markets, prevent fraud and manipulation
To address concerns respecting the potential for manipulation of bitcoin exchange prices, the bitcoin held by the Trust will be valued based on an index that tracks the price of bitcoin in the U.S. OTC market
OTC market is not an electronic market
OTC market transactions are negotiated principal-to-principal, via phone or other means of direct communication and trades are effected in size
OTC prices are not subject to the concerns respecting price manipulation discussed in the disapproval notice
OTC desks are either regulated or affiliates of regulated entities and subject to CFTC jurisdiction
The Trust expects to conduct its bitcoin trading in the OTC market and has identified the OTC market as its principal market for bitcoin for fund accounting purposes
STAFF LETTER ISSUE NO. 1 (Cont’d)
Necessity for negotiability and transaction size in OTC market eliminate ability of market participants to manipulate prices through small orders
The parallel existence of an exchange-based and an OTC market diminishes the risk of manipulation
Anyone attempting a manipulative act in the OTC market would simultaneously need to
Implement parallel manipulations in the exchange spot markets, which would require a tremendous amount of capital across multiple exchanges (in multiple currencies and jurisdictions)
Prevent others from taking advantage of potential arbitrage opportunities between the exchange spot markets, which is further complicated by the tremendous price transparency for bitcoin on exchanges, for which quotes are freely available
STAFF LETTER ISSUE NO. 2 – PRICING AND NAV
Fund must adequately value its assets
Trust will use OTC index for pricing and NAV
OTC index is based on the mid-point of firm bid/ask quotes provided by constituent OTC platforms
OTC desk prices are not subject to manipulation in the absence of misconduct by the trading desks themselves
Constituent OTC index platforms will enter into information sharing agreements with Cboe OTC desks trade with institutional and sophisticated investors
OTC desks follow AML, KYC and BSA regulations, among others
Trades in OTC market are principal-to-principal
The OTC desks are identifiable and accountable to regulators
STAFF LETTER ISSUE NO. 3 – LIQUIDITY
Funds must maintain sufficient liquid assets in order to provide daily redemptions
Current bitcoin supply is approximately $135 billion
Daily USD bitcoin trading volume across major exchanges (those that follow AML, KYC, BSA, etc.) is approximately $1 billion (0.8% of monetary base)
OTC trading volume in the US is significant Average trade size is approximately $250,000 Daily OTC trading volume can range between 25% – 50% of the on-exchange volume: $250 – $500 million (0.2% – 0.4% of monetary base)
Daily bitcoin futures trading volume on CME and Cboe is approximately $150 – $200 million
STAFF LETTER ISSUE NO. 4 – ARBITRAGE
ETF required to have market price that would not deviate materially from NAV
Assuming $1 billion AUM for the ETF, there exists sufficient liquidity to meet redemption orders, even assuming an unprecedented 10% daily redemption
“an illiquid investment means any investment that the fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment”
A 10% redemption, or $100 million, is approximately 8% of daily USD bitcoin trading volume
Trust has already entered into AP agreements with several large institutions
There exist many established market makers that have expressed an interest in making markets in the ETF
These are established market participants that have dedicated ETF trading desks and trade bitcoin directly
STAFF LETTER ISSUE NO. 5 – CUSTODY
Safeguards to ensure funds maintain custody of holdings
bitcoin is a bearer asset – absolute operational risk
The only way to ensure investors are shielded from operational risk is to provide insurance against loss or theft of bitcoin
Insurance eliminates regulatory barriers and counterparty risk barriers that otherwise would prevent institutional participation
Assembled over the course of several years, the Trust has bound $125,000,000 of insurance capacity from a syndicate of A-rated underwriters and arranged to scale coverage with goal to maintain insurance at a one-to-one ratio with bitcoin holdings
Independent auditor and underwriters can and will validate the Trust’s bitcoin holdings
No one clears bitcoin – absolute counterparty risk
DVP- and RVP-style arrangements between Trust and OTC desks
Dealing with OTC desks (registered or affiliates of registered entities) mitigates counterparty risk
ABOUT VANECK
VanEck offers investors forward-looking, intelligently designed investment strategies that take advantage of targeted market opportunities. Founded in 1955, the firm is a pioneer in global investing with a history of placing clients’ interests first in all market environments. VanEck Vectors exchange-traded products are one of the largest ETP families in the world, managing more than 70 funds with approximately $46 billion in assets under management, including mutual funds, ETFs, and institutional accounts
Jan Van Eck is CEO and Director of Van Eck Associates Corporation, Director and President, Van Eck Securities orporation, Director and President, Van Eck Absolute Return Advisers Corporation, and President, and Chief Executive Officer and Trustee, VanEck Vectors ETF Trust. Since joining VanEck in 1992, Jan has created a variety of international, merging markets and commodity-related investment strategies in mutual fund, ETF, and alternative investment formats. Jan received his JD from Stanford University and holds a BA in Economics from Williams College
Adam Phillips is Chief Operating Officer of VanEck Vectors ETFs. Prior to joining VanEck, Adam was the Founder and Managing Member of LB Trading, LLC, a proprietary ETF trading firm on the American Stock Exchange and Junior General Partner and Management Committee Member at Orbit II Partners, L.P., a proprietary trading firm specializing in equity options, index options and ETF market making. Adam holds a BA in Economics and American Civilization from Lafayette College
ABOUT SOLIDX
SolidX is a financial technology company founded in 2014 and based in New York City. It develops cryptography products and services with a focus on software applications and capital markets. The SolidX team has been involved with the bitcoin ecosystem since 2011 and with the financial markets since the early 2000s
Daniel H. Gallancy is the CEO of SolidX Partners Inc. Prior to establishing SolidX, Mr. Gallancy spent a decade in the investment management industry. Mr. Gallancy earned an MBA from Columbia Business School, a BA in Physics and a BSE in Electrical Engineering from the University of Pennsylvania. Mr. Gallancy is a CFA Charterholder
Dimitri Nemirovsky is the co-founder of SolidX Partners Inc. Prior to SolidX, Dimitri spent 15 years as an attorney in the financial services industry with a focus on capital markets and regulation. Dimitri earned his JD from Brooklyn Law School and holds MBA and BBA degrees from Baruch College