Over the weekend, the Securities Exchange Commission temporarily halted trading in US venues of two products from Swedish company XBT Provider. The CoinShares associated operation has had ongoing successes from their Bitcoin and Ethereum instruments across Europe since 2015 and recently made moves to court US investors, with share classes of two products quoted in USD since last month and steadily gaining some traction within the US.
The SEC appears to have delayed any ambitions for CXBTF and CETHF becoming a valid option for the growing numbers of US investors seeking to gain exposure to the nascent cryptocurrency markets, with the Commission pointing towards the contradictory descriptions of the products across Broker-Dealer application documents, online resources and the issuers own offering materials as the reason for the temporary suspension in trading. It seems that the specific structuring of the product has caused some confusion for market participants, which has the lead the SEC to issue a notice for suspension, in the interests of “the protection of investors”.
This year has seen incredible interest within the community as to proceedings within the SEC and the possibility the regulatory body may finally approve one of the endless list of proposed Bitcoin ETFs and the necessary rule changes which would enable them to trade. Coinshares appeared to take advantage of this excitement by recently opting to quote a new class of shares in both their Bitcoin Tracker and Ether Tracker products in US Dollars, leading some US Brokers to make the product available (including Fidelity and E-trade). There are very few traditional investment vehicles which allow investors to gain exposure to cryptocurrency markets, with arguably the most well-known being Grayscale’s GBTC which routinely trades at huge premiums to the underlying, perhaps indicating an impressive demand from US investors for such products.
The XBT Provider products take the form of a non-equity backed certificate, a structure which is in some respects similar to both ETNs and ETFs. The Exchange-Traded Certificate structure is somewhat similar to some ETNs, but as the issuer purchases either Bitcoin or Ether for all certificates issued, the instrument is 100% hedged, and able to cover redemptions. This markedly different from debt-based ETNs which ultimately track an asset synthetically and are backed by the standing of large, well-regarded issuers.
The XBT provider certificates are ultimately guaranteed by Coinshares parent company, Global Advisors LTD in Jersey. However, unlike more common ETF structures wherein ownership of funds’ shares gives indirect ownership of the underlying asset(s), the certificates are arguably a slightly more complex product and due to their trading via Nasdaq Stockholm also entail FX risks between the Swedish Krona and US Dollars.
The SEC decision comes after numerous Bitcoin ETF proposals have been rejected due to a lack of surveillance and controls in the spot market, which is ultimately still dominated by offshore exchanges outside of US jurisdiction. The ETF proposals which have been rejected this year have all proposed utilising the regulated Futures’ which are traded via both CME and Cboe to track Bitcoin, whereas the VanEck proposal which is still awaiting a decision proposes holding the underlying asset in a manner similar to the XBT provider ETCs that the SEC has suspended trading of. A decision on the VanEck proposal is expected by the end of September.
