Bitcoin: ETF Dream Deferred | Chief Investment Officer

Late last Friday, the SEC rejected an application from Winklevoss Bitcoin Trust for what would have been the first exchange-traded fund that tracks Bitcoin. The highly anticipated announcement ended plans to list and trade shares on the Bats BZX Exchange Inc. The SEC was worried about the currency’s vulnerability to manipulation and the feasibility of surveillance. Bitcoin dropped“12.3 percent to $1,069 following the news from the SEC”. It seems, however, to have no trouble recovering from the stumble. CoinDesk, says Bitcoin opened trading Mar. 14 at $1172.91 This rejection denies many investment institutions the opportunity for more direct exposure to the dynamic currency.

Specifically, the SEC expressed concerns that the proposed activity of the ETF would have fallen short of compliance with Section 6(b)(5) of the Exchange Act and rejected a proposed rule change and specifically called out two major, interrelated drawbacks concerning oversight and fraud prevention:

“The significant markets for Bitcoin are unregulated.”
The lack of ability to “enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs.”

The planned ETF classified Bitcoin as a commodity, rather than a currency, with shares representing 0.01 BTC. The shares would have tracked the price of bitcoins on the Gemini Exchange, owned by Gemini Trust LLC. Bats BZX was set to collaborate with the Gemini Exchange to monitor the Winklevoss Bitcoin ETF in the same way the exchange keeps an eye on derivatives trading. The Gemini Exchange has been authorized to trade digital currency for two years by the NY State Department of Financial Services (NYSDFS). Also, last May, the NYSDFS gave its approval for the Gemini Exchange to trade Ether, a new and promising cryptocurrency. Ether, short for Ethereum, can impact trading and institutional investors because it allows for the creation and support of smart contracts for trading without a middle man.

Multiple companies submitted Bitcoin ETFs proposals to the regulatory approval process, including one from SolidX Bitcoin Trust, from SolidX Partners Inc, a blockchain technology services company. Tyler and Cameron Winklevoss, famous for their lawsuit against Mark Zuckerberg, alleging he stole their idea for Facebook, were the first to submit a proposal for an ETF. Their plan for The Winklevoss Bitcoin ETF [Winklevoss Bitcoin Trust (COIN)] had been pending three and half years ago, and experienced more than one decision delay. In the interim, the SEC noted and avowed tighter regulatory surveillance to keep abreast of the burgeoning ETF market, now valued over $3 trillion in net assets.

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The recent trend to increase transparency for Bitcoin has grown in accordance with interest in trading. Chicago Mercantile Exchange, the leading derivatives marketplace, successfully launched two new tools last November, the CF Bitcoin Reference Rate (BRR) and CME CF Bitcoin Real Time Index (BRTI). The BRR “aggregates the trade flow of the major bitcoin spot exchanges during a specific calculation window into a once-a-day, transparent reference rate of the US dollar price of bitcoin,” according to a CME press release. To do this, CME works with several bitcoin exchanges and trading platforms including Bitfinex, GDAX, itBit, Kraken, and Bitstamp.

What’s Next?

Bitcoin’s future faces other challenges, including piracy and liquidity risk. Unique partnerships, such as the one between Polychain Capital and venture capital players, Andreessen Horowitz and Union Square Ventures, are forming to seek the rewards in the risk. Blockchain, the technology behind Bitcoin, is also making inroads in other areas of business, including shipping logistics, manufacturing and more.

Cryptocurrencies are decentralized global digital currencies that provide relatively more secure and efficient means of payment and offer. The underlying technology makes tracking assets and transactions more secure. Thusfar, these advantages have attracted interest from banks and other financial institutions. But will major industry players continue to race to prepare for a future defined by this new asset class? Only time will tell.

By Tasha Williams

Old-line companies with traditional pensions expect to spend hundreds of millions of dollars to shore up their defined benefit plans during 2017.

Xerox Corp., for instance, expects to contribute $350 million to its defined benefit plan in 2017, nearly double the amount of its contribution in 2016. DuPont says it will contribute $230 million to its main US pension plan this year, similar to the 2016 total, and hundreds of millions more to other plans.

And U.S. Steel predicts its pension expense will reach $180 million in 2017. The company put shares worth $100 million into its pension plan last year.

Large, long-established employers have been moving away from traditional pension plans toward defined contribution plans. To reduce pension risk, they’ve been closing plans to new employees, freezing benefits for existing workers and offering lump-sum buyouts to former employees.

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In the meantime, returns in their pension plans have been hurt by rock-bottom interest rates and weak performance by bonds.

Xerox, for its part, says in its recent annual report that its pension plans were underfunded by nearly $2.2 billion at the end of 2016. While the Norwalk, Conn.-based company has frozen pension benefits, there’s enough uncertainty around future expenses that the pension appears among the risk factors in Xerox’s annual report.

Xerox’s pension plan allocation in 2016 included 30% stocks, 48% fixed-income instruments, 6% real estate, 8% private equity and 8% other.

U.S. Steel is in a similar situation. It froze pension benefits at the end of 2015, instead giving steelworkers 50 cents an hour as a contribution to their defined-contribution plans.

While most corporate pension plans employ conservative asset allocations, U.S. Steel says in its recent annual report that stocks and private equity account for fully 60% of its portfolio.

The Pittsburgh-based company made a well-timed move in August 2016, when it contributed 3.8 million shares of common stock valued at $100 million to its main pension plan.

The move proved prescient. U.S. Steel shares were valued at $26.57 at the time the company made the contribution to the pension plan. Since then, they’ve soared 40%.

DuPont announced in late 2016 that it would freeze pension benefits for existing employees. Meanwhile, during the fourth quarter, DuPont paid out $550 million in lump-sum payments to former employees who opted for a one-time payment over future pension benefits, the company said in its recent annual report.

Xerox, U.S. Steel and DuPont join other large, established companies in warning investors about large pension expenses. General Electric expects to contribute $1.7 billion to its pension plan in 2017. Caterpillar anticipates a contribution of $610 million this year. And Merck projects a $235 million contribution to its pension plan in 2017.

Johnson & Johnson didn’t project its pension contribution for 2017, but it contributed $838 million to pension plans in 2016. Meanwhile, Johnson & Johnson paid $420 million in lump-sum payments to former employees who agreed to them.

By Jeff Ostrowski