After denying an application on March 10, 2017, by the Bats BZW Exchange to list and trade shares of the Winklevoss Bitcoin Trust, the U.S. Securities and Exchange Commission has agreed to take a second look, according to an order published on its website (http://dtn.fm/jUm5B). This will undoubtedly cheer up Cameron and Tyler, the Winklevoss twins, who, according to the New York Times’ Deal Book, introduced their Winkdex Bitcoin ETF proposal back in February 2014 (http://dtn.fm/MkTK5). The Winklevoss brothers are ardent, and wealthy, advocates of the crypto-currency. The SEC order granting the petition to review marks a crucial point in the development of the digital currency. It is unlikely that Bitcoin will ever gain widespread acceptance without the blessing of U.S. regulators.
Bitcoin has tickled the public’s curiosity, particularly after the secret shenanigans of Dread Pirate Roberts became public. No doubt inspired by the ruthlessness and ingenuity of the fictional hero or heroes in The Princess Bride, Ross William Ulbricht assumed the moniker for his dealings on the Dark Web. Displaying once again a romantic streak, Ulbricht set up an online bazaar for illegal substances, which he named Silk Road, and thereon peddled pure Oxycodone HCL powder in 0.25 gram packets for 0.53 Bitcoins, generic XANAX 1mg pills in 400-pack sizes for 1.52 Bitcoins, Testosterone Cypionate 10 x 250mg/ml servings for 0.69 Bitcoins and a variety of other illicit titillations. Merchandise on Ulbricht’s Silk Road, named after the ancient trade route that connected China to the West, had price tags denominated in the digital currency, no doubt because, like cash, both buyers and seller can remain anonymous.
The ability to protect the identities of parties to a transaction is, perhaps, the feature of Bitcoin that has driven its use so far. However, Bitcoin and other crypto-currencies offer a much more important benefit, one that would certainly gain the attention of retailers. Typically, merchants are burdened with high transaction costs when they accept payment through debit and credit cards. Bank charges can run as high as 3 percent of transaction value. These costs are, to some extent, justified, since banks support and maintain the payments infrastructure and stand, between parties, as a trusted third party. But Bitcoin denominated transactions would avoid that transaction ‘tax’, because the Bitcoin network dispenses with any intermediary.
Instead of an intermediate trusted third party that guarantees the authenticity of a transaction, the Bitcoin system employs cryptography. Bitcoins are accessed and spent by using a ‘private key’, which performs the same role a physical key does in securing a store of valuables. Consequently, someone who gains access to private keys can spend the Bitcoins in an account.
In reporting on the SEC’s denial to have the Winklevoss ETF listed on the BZW, Deal Book pointed to yet another useful function of Bitcoin – as an investment vehicle or asset (http://dtn.fm/7pdaI). For reasons not yet determined, Bitcoin creator, Satoshi Nakamoto, when he launched the digital currency in 2009, set a limit of 21 million to the number of Bitcoins that could be created or ‘mined’. Now, about 16 million Bitcoins are thought to be in circulation (http://dtn.fm/1aZiZ) and, just like any other commodity, the value of Bitcoins will fluctuate, particularly as there is a limit set to supply.
The SEC in its disapproving order (http://dtn.fm/C4t6G) set out the reasons for its denial, writing:
‘…the Commission believes that the significant markets for Bitcoin are unregulated. Therefore, as the (BZW) Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs—agreements that help address concerns about the potential for fraudulent or manipulative acts and practices in this market—the Commission does not find the proposed rule change to be consistent with the Exchange Act.’
In filing for review, the Winklevoss duo appears to have developed a Plan B. We look forward to seeing what that is.
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