Beware bitcoins

The Winklevoss Bitcoin Trust proposed the ETF with each share representing an amount of bitcoin held by the Trust. Currently, such an investment vehicle is only available to wealthy investors, through funds like the Bitcoin Investment Trust. The Winklevoss ETF was intended to allow people with a brokerage account to invest in Bitcoin without having to worry about the challenges of buying, storing, and safekeeping bitcoin.

The US Securities Exchange Commission disapproved the proposal because it was found to be inconsistent with the requirement that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest. The USSEC believes that to comply with the rules an ETF must first have surveillancesharing agreements with significant markets for trading the underlying commodity or derivatives, and second, those markets must be regulated.

The exchanges where trading of these Bitcoin ETFs take place are not regulated or audited, and are suspected of engaging in unethical practices like front-running, wash trades, and trading with insufficient funds. Other comments include that the price of bitcoin is defined entirely by speculation, without any ties to fundamentals, and furthermore, that a sizeable number of traders and owners of bitcoin do not desire to trade in a well-regulated environment for reasons including tax evasion, evading capital controls, and money laundering.

Analysts have stated that the market for bitcoin, by trade volume, is very shallow and have noted that the majority of bitcoin is hoarded by a few owners or is out of circulation. Ownership concentration is high, with 50 percent of bitcoin in the hands of fewer than 1,000 people, and that this high ownership concentration creates greater market liquidity risk, as large blocks of bitcoin are difficult to sell in a timely and market-efficient manner.

Several fundamental flaws make bitcoin a dangerous asset class to force into an exchange traded structure, including shallow trade volume, extreme hoarding, low liquidity, hyper price volatility, a global web of unregulated bucketshop exchanges, high bankruptcy risk, and oversized exposure to trading in countries where there is no regulatory oversight. A lack of regulation and consumer protection also increase the chance and incentives for market price manipulation, and approving the ETF before structural protections and controls are firmly in place would put investors at undue risk.

It is only a matter of time before attempts are made for these bitcoins to enter the local market, if they have not already formed part of our shadow banking system. In addition, ETFs are already invested in by some of our Systemically Important Financial Institutions.

Bitcoin valuation is extremely speculative in nature, very unstable and presently unregulated by any central authority. There is no authority to go to in the event of difficulties with Bitcoins. This risk will ultimately be taken by Bitcoin ETF investors. ETFs would be open to the common market risk and liquidity risk. With no selected clearinghouse or central depository for custody of Bitcoins, Bitcoins are susceptible to digital theft and loss even from the ETF’s custodian. Our regulators need to pay attention to these developments if only to develop policy positions to protect our investor