What The ETF: VanEck Is Not Giving Up on SEC Applications

The VanEck BTC Trust is an exchange-traded fund (ETF) that has undergone multiple revisions since its inception all the way back in 2018. However, it has failed to materialize due to the United States Securities and Exchange Commission’s unwillingness to embrace the asset class.

Institutional investment in BTC has ramped up since the latter half of 2020. Between global technology giants finally adding cryptocurrency to their balance sheets and El Salvador declaring BTC legal tender, it’s clear that the asset class is stronger than it has ever been.

Despite this bullish sentiment, though, the U.S. has yet to approve a single BTC ETF.

Why a BTC ETF?

ETFs are a popular type of investment fund that abstract the complexities of holding the underlying asset. In the case of BTC, it would remove the responsibility of securing a BTC wallet for long-term investing.

Over the past few decades, ETFs have become an increasingly popular investment choice for certain assets. This is especially true of commodities such as gold. In fact, gold ETFs, in particular, have expanded 42% per year on average since 2003.

Most investors looking to profit from gold as a store of value are unlikely to have the resources to own it in its physical form.

Similarly, BTC can sometimes be challenging to acquire and manage safely. This is especially true for those coming from a traditional investment background. An ETF abstracts these difficulties, lowering the bar for BTC investment and solidifying its role as a store of value.

An ETF three years in the making

VanEck is an extremely dominant player in the ETF space. It was established in New York under the title of Van Eck Global.

Since 1955, the company has launched dozens of funds across several international markets. These include South East Asia, Europe, Australia, and North America.

The backing of a company as influential as VanEck has major implications for the cryptocurrency industry. Especially because the investment firm appears to have market commitment, it has relentlessly sought the approval of a BTC-backed ETF over the past three years.

VanEck’s original ETF application dates all the way back to August 2018. It was sponsored by the blockchain company SolidX at the time. The fund was slated to be titled the VanEck SolidX BTC Trust. Each share would cost investors a staggering $200,000 — signaling that the product was designed solely with institutional investors in mind.

Even after multiple revisions to the original application, however, VanEck and SolidX failed to win the trust of the SEC. Alongside many other BTC ETF applicants.

Eventually, in September 2019, the firms withdrew their application from the SEC’s review. However, VanEck said it was committed to launching a BTC ETF and would reapply at some point.

Another year passed by before the investment firm readied a new proposal. In December 2020, a new application for the VanEck BTC Trust went to the SEC. Notably, this revised ETF proposal did not list SolidX as a sponsor or partner, indicating VanEck would be on its own for this endeavor.

VanEck’s existing cryptocurrency investment products

VanEck’s proposed BTC ETF will not be the firm’s first foray into the cryptocurrency industry. In Europe, the company already offers institutional investors a BTC-backed exchange-traded note (ETN) product.

Named VanEck Vectors BTC ETN, it trades under the VBTC ticker. These days, traders pay a mere 1% in fees to the fund, down from the initial 2%. ETNs are an investment vehicle like ETFs, replicating the underlying asset’s performance. However, they are typically debt offerings, similar to bonds.

Even though ETNs are traditionally unsecured debt securities, VanEck says that its VBTC product is 100% backed by BTC that is wholly owned by the firm.

This makes VBTC a fully collateralized ETN. Mandatory public disclosures allow us to know that VanEck currently holds 4,221 bitcoins in cold storage. A regulatory third-party custodian manages this storage.

With holdings amounting to roughly $150 million, VBTC is clearly a much smaller investment offering than other established institutional ETFs. According to data from BTC Treasuries, VanEck’s ETN accounts for just 0.025% of all BTC in circulation.

In comparison, Grayscale Investment’s GBTC owns upwards of 654,800 BTC. This translates to 3.12% of the cryptocurrency’s maximum supply. Still, it’s worth noting that VBTC has only been trading since November 2020, while Grayscale enjoyed an early mover’s advantage.

According to the official VBTC fact sheet, VanEck’s ETN trades on four exchanges in the European Union — namely Germany’s Deutsche Börse, Six Swiss Exchange, Euronext Amsterdam, and Euronext Paris.

VanEck, SEC and BTC manipulation

VanEck aims to answer the SEC’s concerns of fraud and manipulation by relying on multiple exchanges for price data instead of just one.

More specifically, the firm has stated that it will use CryptoCompare’s BTC Benchmark Rate index to determine the fund’s daily rate change.

This index calculates an equal-weighted average of the prevailing price at multiple cryptocurrency trading platforms. The exchanges considered for the index include Bitstamp, Coinbase, Gemini, itBit, and Kraken.

In the 60 minutes leading up to 4 PM EST every day, MVIS and CryptoCompare capture 20 snapshots of trading prices at these exchanges.

Chunks of data are collected over three-minute periods. As a result, VanEck says that the index is resistant to manipulation by malicious actors.

Furthermore, the firm claims that the use of a volume-weighted median instead of a simple median prevents manipulation by individuals executing a large number of low-dollar trades.

This is because the number of trades is irrelevant — only the volume matters. Most malicious individuals do not own enough BTC to overwhelmingly turn the tide against typical volumes at multiple large exchanges.

All combined, VanEck believes that these measures will sufficiently safeguard U.S. investors from manipulation and keep the SEC’s concerns at bay. Whether the agency thinks similarly, however, remains to be seen.

Is VanEck likely to win the SEC’s approval?

Even though the SEC received VanEck’s ETF filing in December 2020, it didn’t begin examining it until several months later.

On April 28, the agency released a press release that confirmed what most feared — the decision would be delayed for 45 days. On June 17, another delay was confirmed. This time, however, the agency has invited public comment on the matter.

As cryptocurrency investors await the SEC’s decision with bated breath, regulators in many other developed countries have gone ahead and approved BTC ETFs without much fanfare. Canada, much to everyone’s surprise, greenlit multiple BTC ETFs earlier in 2021.

One of the funds, backed by Purpose Investments, attracted investments worth $421 million in the first two days alone. The ETF’s Assets Under Management (AUM) metric went on to breach the $1 billion threshold only two months later.

A similar fate is likely for whichever BTC ETF wins approval in the U.S. Notably, the SEC has not approved or denied any cryptocurrency ETFs since Jay Clayton stepped down as the chairman in December 2020. Gary Gensler is now head of the agency, a known blockchain advocate.

Many in the cryptocurrency community are hopeful that the agency’s ruling on BTC ETFs will be favorable this time around. After all, it is likely no coincidence that the VanEck filed its latest application just days after Clayton’s final day in office.

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