New Bitwise research seeks to fill gaps in rival bitcoin ETF proposals

Bitwise Investments chief investment officer Matt Hougan expressed skepticism about the inclusion of surveillance sharing agreements in spot bitcoin ETF proposals from competing firms. He noted that these agreements, while seemingly robust, might not necessarily serve as a surefire path to regulatory approval.

The firm — in an effort to prove the bitcoin futures market leads price discovery over the spot market and is a “regulated market of significant size” — added 40-plus pages of research Monday addressing the US Securities and Exchange Commission’s rebuttals to various bitcoin ETF filings over the years.

The amended filing, submitted by 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.

Judges in that case said the regulator’s approval of bitcoin futures ETFs, but not the conversion of the Grayscale Bitcoin Trust (GBTC) to an ETF, was “arbitrary and capricious.”

Bitwise, in its amended filing Monday, pointed specifically to the SEC 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 surveillances could reasonably be relied upon to capture the effects on the CME bitcoin futures market caused by a person attempting to manipulate the proposed futures ETP by manipulating the price of CME bitcoin,” the filing states.

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“While the Commission rejected the view that this logic extended to spot bitcoin ETPs, this view was recently rejected by the Court of Appeals for the DC Circuit,” it adds.

But the SEC can still choose to appeal the DC Circuit Court of Appeals decision, Bitwise’s Hougan noted in an X post Monday.

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Proposed issuers of spot bitcoin ETFs, he added, must prove that the CME bitcoin futures market leads price discovery over the spot market and be a “regulated market of significant size” for the purpose of surveillance.

“Unfortunately, existing filings do not include substantively new arguments or research addressing this question head-on,” Hougan said in the X thread. “Surveillance sharing agreements with spot exchanges are positive, but may not satisfy the technical regulatory requirements.”

The would-be listing exchanges of bitcoin ETF proposals by BlackRock, Fidelity and others have noted in filings that they have “reached an 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 firm does not believe a surveillance-sharing agreement with a spot bitcoin market should be a “silver bullet” for bitcoin ETF approval.

Crypto-focused investment firm Skybridge Capital countered that argument in its own letter to the SEC last month, arguing that such a deal with Coinbase “adequately addresses” the SEC’s concerns around market manipulation.

Defending previous research

Bitwise’s latest attempt to launch a spot bitcoin ETF comes after two previous tries. The SEC has never allowed such a product by any issuer to come to market.

“In particular, we try to clear up the significant confusion around the growing body of academic literature on price discovery in the bitcoin market, and demonstrate that every well-designed academic study supports the finding that the CME is ‘significant,’” Hougan noted in the X thread about Bitwise’s latest filing.

The firm had submitted a 100-plus page whitepaper in October 2021 showing the CME bitcoin futures market led the spot market and unregulated bitcoin futures market.

The Sponsor also submitted a 24-page white paper demonstrating that a new bitcoin ETP is unlikely to predominantly influence CME bitcoin futures market prices.

The Monday amended filing addresses eight disagreements the SEC had with Bitwise research included in its previous bitcoin ETF application — including the so-called “mixed” or “inconclusive” academic record regarding the lead-lag relationship between spot and futures markets, according to the regulator.

Bitwise argues there is actually “a high degree of consensus” among various studies showing that the CME futures market leads the spot market.

“No single statistical study can answer every question, consider every variable, or use every statistical approach to a given problem,” the Monday filing notes. “[Bitwise] designed its study — developed over a series of 14 meetings with the [SEC] staff — to supplement the broader academic literature investigating price discovery in the bitcoin market.

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