One company thinks it knows how to get a bitcoin exchange-traded fund (ETF) approved by U.S. regulators.
Wilshire Phoenix, a relatively young financial firm in New York, filed to launch the United States Bitcoin & Treasury Investment Trust ETF in May with NYSE Arca. At that point, a dozen bitcoin ETF proposals had already been swatted down by the U.S. Securities and Exchange Commission (SEC) – including nine in one day. But unlike other ETF applications, Wilshire Phoenix’s ETF will invest in both bitcoin and U.S. Treasury securities, commonly referred to as T-bills.
The SEC is currently reviewing the application.
“Our proposed bitcoin-related ETF is quite different from those that have previously been submitted to the Commission for approval,” Wilshire Phoenix founder and managing partner William Herrmann said in a phone interview. “To name just a few distinctions, the composition of the Trust is very different. Our Trust is a multi-asset trust (bitcoin and T-Bills), as opposed to just bitcoin.”
The SEC has long been hesitant to approve an ETF with exposure to digital assets, citing the market’s relatively young age and the possible risks to investors. The agency has rejected a number of proposals, while other applicants have proactively withdrawn their filings.
Herrmann says the Wilshire ETF has several mechanisms to address these concerns.
The Trust itself will automatically rebalance itself monthly to address possible concerns about bitcoin’s price volatility, Herrmann explained. Essentially, if bitcoin’s price volatility increases, the index will reduce its exposure to the cryptocurrency and instead increase its exposure to Treasury bills. As bitcoin’s volatility falls, the opposite occurs.
The weighting will be transparent, with the index being shown on Bloomberg and Thomson Reuters portals, he said.
The CME’s Bitcoin Reference Rate will provide the data for bitcoin’s price in the Trust, rather than use an in-house price method “or one from any related party,” he added.
Wilshire Phoenix is also hoping to address SEC concerns about market manipulation by using a surveillance sharing agreement, one component the regulator stressed was needed when rejecting a recent bitcoin ETF application. Herrmann said:
“The CME has surveillance sharing agreements with both the CME futures market as well as the relevant portion of the spot market that forms the basis for the Trust’s bitcoin values. This addresses the SEC concerns about the lack of surveillance sharing agreements with the relevant spot market, which is something previous applicants have not been able to address.”
Most recently, the SEC denied Bitwise Asset Management’s fund. In a whopping 112-page order published Oct. 9, the regulator said surveillance-sharing agreements were necessary and market manipulation remains a real concern.
As recently as September, SEC Chairman Jay Clayton said that while progress has been made in the space, the market manipulation question had not been resolved.
For Wilshire Phoenix’s proposal, the SEC began accepting comments on the proposal in June, though a final decision is still months away. The agency is currently accepting comments on the proposal through Nov. 12, 2019.
Herrmann is optimistic about the ETF proposal’s chances, saying “we developed the ETF consistent with investor protection as well as fair, orderly and efficient markets.”
Kik Suffers Setbacks With ‘Void for Vagueness’ Defense in SEC Case
Kik is struggling to mount a strong defense in a case brought by the U.S. Securities and Exchange Commission (SEC) over its $100 million initial coin offering.
As reported last month, Toronto-based Kik’s legal team attempted to persuade the district court of the Southern District of New York that the SEC’s case – alleging the 2017 token sale violated securities laws – was void based on the premise that the legal definition of an “investment contract” is unclear. Kik argued that this “vagueness” precluded the definition from applying to its “kin” token offering.
The firm also sought to depose SEC officials in a bid to show the securities watchdog wasn’t in a position to give clear guidance on token sales at the time of Kik’s ICO.
The SEC, not surprisingly, vigorously opposed the “void for vagueness” defense, stating at the time:
“This defense asserts that, notwithstanding 70-plus years of well-settled jurisprudence, the term ‘investment contract’ in the securities laws is void for vagueness as applied to Kik’s investment scheme. This claim is untenable and should be dismissed.”
Soon after our previous report, the judge in the case, Alvin K. Hellerstein, sided with the SEC view and refused Kik’s motion for discovery.
Not only that, but Hellerstein on Tuesday threw out a subsequent motion to reconsider from the former messaging app company, tearing up Kik’s vagueness defense with the explanation:
“Defendant’s motion for reconsideration is a reargument of matters that were before me when I denied the discovery sought. Defendant does not mention any new matter of fact or law, or any binding precedent that I failed to consider. That is enough to deny the motion. Furthermore, as I originally held, the deliberations within an agency sheds no light on the application of the statute or regulation in issue. If the law is vague, or confusing, or arbitrary, as defendant argues, that can be argued objectively. Proper discovery should be focused on what defendant did, and not why the agency decided to bring the case.”
Last month, Kik’s messaging platform was acquired by MediaLab, a holding company with Whisper and other apps in its portfolio. Kik CEO Ted Livingstone has said the SEC action prompted the sale.
So what’s next? In the latest filing, also made public Tuesday, the SEC asks Judge Hellerstein to allow it to depose seven individuals after the current fact discovery deadline of Nov. 29.
These individuals include blockchain author and investor William Mougayar, kin app developer Luc Hendriks and Ilan Leibovich, who was Kik’s VP of product around the time of the ICO. Hellerstein has yet to respond to the SEC’s request.
The date of the next hearing is yet to be determined.
You can read the SEC’s letter below:
SEC Letter to Judge Hellerstein in Kik Case by CoinDesk on Scribd
Reggie Middleton Reaches $9.5 Million SEC Settlement Over ICO Fraud
The U.S. Securities and Exchange Commission (SEC) said it has reached a settlement with Reggie Middleton, organizer of the fraught $14.8 million Veritaseum (VERI) initial coin offering (ICO).
In a filing with the New York Eastern District Court, dated Oct. 31 and published today, Middleton agreed to the consent decree of the final judgment, without having to admit or deny the allegations, while waiving any right to appeal.
The settlement came three weeks after the court announced that it had entered into a discussion with Middleton to settle the case.
The defendant agreed to pay approximately $9.5 million to settle the case.
According to the SEC filing, Middleton has the obligation to pay disgorgement and prejudgment interest of $8.47 million, plus a civil penalty of $1 million.
The case concludes the long-running saga since 2017, with Middleton accused of allegedly raising millions of dollars through an initial coin offering without registering with the SEC, while misleading investors to attract more funds with false information.
A week after the raise, Middleton claimed a hacker stole 36,000 of its tokens, valued at $8 million, and subsequently exchanged them for ether, and the funds are still missing, according to the filing.
According to the initial complaint filed by the SEC, at multiple times, the defendant referred to the tokens as “software” or compared them to prepaid gift cards to be used on a technological platform.
The SEC also accused Middleton of manipulating the securities’ value post-ICO, and misappropriating at least $520,000 of investors’ money for personal use, the complaint said.
In an emergency action in August, the SECr froze Middleton’s assets and asked the court to prevent him from continuing to operate a public company or participating in a digital asset securities offering.
The case is one of the latest settlements for fraudulent ICOs. Data storage startup Sia negotiated a $225,000 settlement over its $120,000 raise on Oct.1, while EOS maker Block.One agreed to pay a $24 million penalty on a raise that totaled $4.1 billion on Sept 20.
Harbor Now Has Both Broker-Dealer and Transfer Agent Licenses in the US
Security token startup Harbor has secured a transfer agent license from the U.S. Securities and Exchange Commission (SEC).
A month after receiving a broker-dealer license from the Financial Industry Regulatory Authority (FINRA), Harbor was granted the license Thursday to better ensure interest and dividend payments to investors. The firm is the first blockchain company to be granted both licenses.
Transfer agents act as liaisons between firms, investors and regulatory bodies by keeping track of investment certificates. If a wallet contained security tokens is lost, for example, the transfer agent can help mint new tokens to replace the lost securities. By acquiring the license, Harbor has the green light to service higher class firms, investors, and offerings.
Seeking to become a “one-stop-shop” for digital asset issuance, Harbor has done its fair share of leg work to get the appropriate regulatory licenses. In fact, it took over a year, according to CEO Josh Stein.
“It took the regulators a long time to get a handle on the space and understand it and its implications. This was very new for the SEC and FINRA, and they wanted to do it right,” Stein said as the firm was awarded the broker-dealer license.
Harbor recently engaged in a $100 million real estate tokenizing effort on the ethereum blockchain on behalf of four firms. By tokenizing investor shares, Harbor and the 1,000 plus participating investors and placement holders hoped to decrease digital asset management friction.