The SEC failed to prove that dog wags tail, court rules

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A three-judge panel ruled today that the SEC’s decision was “arbitrary and capricious.” . . Is there any essential difference between spot market and futures market?

hold on.

For some background: U.S. District Court vacated The SEC’s decision prevents Grayscale from converting its closed-end GBTC fund into a spot bitcoin ETF. Grayscale has been trading below net asset value, assuming investors cannot legally claim their bitcoins.

Bitcoin rose 7.5% on Tuesday. Grayscale’s Bitcoin Trust rose 18%. Even Coinbase is up, up 16%.

but court decisionOn the face of it, a little strange. Judge Naomi Rao wrote:

RAO, Circuit Judge: A fundamental principle of administrative law is that agencies must treat similar cases equally. The SEC recently approved two bitcoin futures funds to trade on national exchanges, but declined to approve Grayscale’s bitcoin fund.

In requesting the review board’s denial order, Grayscale insisted that its proposed bitcoin exchange-traded product, which is substantially similar to bitcoin futures exchange-traded products, should have been cleared to trade on NYSE Arca. we agree. The rejection of Grayscale’s proposal was arbitrary and capricious because the commission failed to explain its different treatment of similar products. Therefore, we grant Grayscale’s request and rescind the order.

similar product. . . Wait, what type of similar products are they?

In this case, the court was referring to a bitcoin futures ETF:

“This tight correlation is no coincidence: Bitcoin futures prices are ultimately based on spot market prices. Bitcoin futures trade based on a forecasted settlement price, which in turn is calculated using the Bitcoin reference rate. The reference rate, like the CoinDesk index, aggregates Spot prices on multiple exchanges. ID. 40,317. Four of the six exchanges are shared between indices. See ID. 40,318. A study by a finance professor and expert in derivatives contract valuation found that , the CoinDesk index and reference rates are “nearly perfect substitutes.”

In other words, arbitrageurs in the bitcoin market are doing arbitrage well. (In return for this, they get more arbitrage opportunities.)

But is the SEC’s question about the Grayscale ETF really about whether the spot and futures markets trade closely enough?

Or that there is no reasonable way to ensure that the global OTC market is properly monitored, and by allowing Grayscale to further liquefy it, the US is helping sketchy things that might happen on a global scale. -The counter market?

Judging from the verdict:

In approving the bitcoin futures ETP, the Commission acknowledged the risk of bitcoin futures fraud in “transactions outside of CME’s bitcoin futures markets,” such as spot market transactions. Teucrium Order, 87 Fed. register. 21,679; Valkyrie Medal, 87 Fed. register. 28,851. hehe.

This is an important issue for futures ETPs to address, as futures markets are “difficult to manipulate…”. . . Because of actual and potential competition from spot commodities,” the main risks generally exist in spot markets. See Frank H. Easterbrook, Monopolies, Manipulation, and Regulation of Futures Markets, 59 J. Bus. S103, S103 (1986). Bitcoin Fraud and manipulation in the spot market pose similar risks to both futures and spot products. Since the spot bitcoin market and the CME bitcoin futures market are closely related, price distortions in the spot market will be reflected in prices in the futures market. After all, futures are spot market derivatives.

The SEC does not consider the 99.9% correlation to be coincidental or caused by some third variable. We recognize the fundamental principle that mere correlation does not equal causation. But the correlation here is based on the logical and mathematical connection between spot and futures markets. In this case, a near-perfect correlation is at least strong evidence for causation.and The committee failed to explain why a monitoring sharing agreement with CME was sufficient to protect a bitcoin futures ETP from potential fraud, but not Grayscale’s proposed bitcoin ETP.

wait, what?

Of course, it is reasonable to argue that Bitcoin futures are at risk of manipulation or fraud in the spot Bitcoin market.

But if the spot bitcoin market is adequately regulated, it appears to be because the CFTC regulates its futures market. . . Strange. Does this mean the CFTC implicitly Regulating the market for every listed futures with some weird temporary arbitrage properties?For example, few would argue that the CFTC’s regulation of Treasury futures makes it unnecessary for the SEC to Supervision of treasury bond trading platforms. (In fact, the national debt is October 2014 Provides a useful demonstration of what can go wrong in unregulated cash transactions. )

However, there is a practical example of ETF trading today that resembles a spot bitcoin ETF: the SPDR Gold Trust, which went public in November 2004 and is backed by gold bars held in vaults.

What gold and Bitcoin have in common is that they are both money transfer tools and are said to be very popular money laundering, crimeand cross-border capital flight. They are all popular in liberal political circles and are traded in global over-the-counter markets that cannot be thoroughly monitored.

If anything, the gold market is actually harder to regulate than Bitcoin because — lest we forget — Bitcoin is fakeNemos, no anonymousimus.

If State Street can issue a gold ETF backed by physical gold in its vaults, it doesn’t seem unreasonable to think that Grayscale could turn its spot bitcoin fund into an ETF.

Now, one could easily use this argument to say that the US shouldn’t be listing ETFs backed by spot gold.

Or you could be on the other side, like Virtu Financial’s Doug Cifu:

“Politics Gary wears pants again’ was an inspired phrase from Dougielarge.

Of course, this is pretty esoteric. . . What does “wear pants” mean? Did he mean “torn by pants”? Like a middle school bully pulling someone’s pants down during recess?

Most importantly: Does “Gensler Political” imply the existence of Gensler Apolitical?

Svlook