Tag Archives: ETFs

Why the SEC keeps rejecting Bitcoin ETF listings

Last week the U.S. Securities and Exchange Commission (SEC) refused to approve nine different proposals for bitcoin exchange traded funds (ETFs). This comes on top of a number of prior SEC refusals of bitcoin-based funds, including the SolidX Bitcoin Trust and two separate denials of the Winklevoss Bitcoin Trust, the first in 2017 and the second this summer.

Why have so many other U.S.-listed commodity ETFs been approved over the years whereas bitcoin ETFs keep getting rebuffed? It is tempting to view the SEC smackdown of these bitcoin ETF proposals as a sign of distaste for this new and anarchic technology. But I don't think this reading is accurate. If anything, SEC vs Bitcoin is less about Bitcoin and more about the SEC's attempt to impose standards in an age where Wall Street is trying to package almost everything into a broadly-available security.

Precious metals buyers will of course be familiar with ETFs. The granddaddy of all commodity ETFs, the SPDR Gold Trust, or GLD, has been around since 2004 and is currently backed by around US$29 billion in physical gold, or 760 tonnes. All ETF units trade on a stock market. A peculiar set of mechanics ensures that they replicate the price of their underlying index or commodity. Using GLD as an example, if the price of the ETF is above the current gold price, then special institutions (otherwise known as authorized participants) can buy physical gold, exchange it for new units of GLD, and sell those units at a profit. If GLD is trading below the gold price, these same authorized participants can buy the underpriced GLD units, redeem them for gold, and sell the commodity for a risk-free gain. Competition among authorized participants for profit ensures that the two prices do not diverge by very much. Regular investors do not have the ability to convert units into gold, or vice versa. (For a more thorough explanation, see Bullionstar's introduction to gold ETFs.)

The SEC has approved ETFs that track gold, silver, platinum, palladium, copper, oil, natural gas, coffee, as well as broader-based ETFs that track baskets of commodities. Virtual currencies like Bitcoin, also known as cryptocurrencies, have been defined by the U.S. Commodity Futures Trading Commission (CFTC) to be commodities. The SEC's refusal to allow bitcoin ETFs thus has nothing to do with bitcoin's underlying nature: like gold, silver, and the rest, it is legally a commodity. Rather, the reason that the Winklevoss Bitcoin Trust, the first of the proposed bitcoin ETFs, has failed to make it through the SEC's doors is that the SEC doesn't like the way that the market for bitcoins is structured.

Cooperation from crypto exchanges - A tall order

Specifically, the SEC is unhappy with the inability of the the Bats BZX Exchange, the stock exchange on which the Winklevoss Bitcoin Trust is seeking a listing, to secure information sharing agreements (ISAs) with important bitcoin exchanges. An information sharing agreement between the Batz BZX exchange and, say, Chinese-based Binance, one of largest bitcoin exchanges, would obligate Binance to share relevant data about market trading activity and customer identities with Bats.

The SEC believes that information sharing agreements with significant exchanges are key to compliance with the Securities Exchange Act, the body of legislation that governs the SEC. Specifically, Section 6(b)(5) of the Act requires the SEC to ensure that the securities exchanges it regulates, including Bats BZX, are designed to prevent fraudulent and manipulative acts and to "protect investors and the public interest."

The SEC has chosen to take a very strict interpretation of 6(b)(5) when it comes to the listing of an overlying security, i.e. securities that derive their value from some underlying security or commodity (much like how units of the Winklevoss Bitcoin Trust overlie, or are underlain by, physical bitcoin). Not only must an exchange like Bats BZX ensure that it has controls to prevent manipulative behaviour of Bats-listed overlying securities, but it must also take reasonable steps to ensure that the underlying instrument to which it is linked is traded on an exchange that is held to the same standards. The SEC deems that an information sharing agreement between the relevant exchanges is sufficient to fulfill this requirement. That way, if there were to be suspicions of manipulation of bitcoin on the Binance exchange, Bats BZX would be able to get data from Binance and use it to conduct investigations into possible trading violations.

In its second refusal of the Winklevoss Bitcoin Trust, the SEC maintained that it has a long history of requiring information sharing agreements between SEC-regulated exchanges that list overlying securities and exchanges that list the underlying instrument. It points to a ruling it made in 1994 in which it required that the CBOE, which wanted to list equity options on American Depository Receipts (ADRs), would in certain cases be required to have a formal mechanism for getting information from the overseas exchanges trading the individual stocks underlying the ADR.

The SPDR Gold Trust as precedent

The SPDR Gold Trust (GLD) provides further precedent. When the SPDR Gold Trust was approved in 2004, the sponsoring exchange, the New York Stock Exchange (NYSE), was unable to establish information sharing agreements linked to spot trading. Securing agreements was deemed impossible since most gold spot exchanges occurs relatively informally via the London over-the-counter gold market.

In lieu of information about spot exchanges, the SEC decided that two factors were sufficient for the proposal to meet its requirements. First, it claimed that gold OTC markets are very liquid and thus difficult to manipulate. Second, the NYSE had an information sharing agreement with NYMEX, whose COMEX division listed the most popular set of gold futures contracts. Since the COMEX market is a regulated exchange that the SEC deemed "significant", the sharing of information between the NYSE and COMEX would help ensure that manipulation could be caught. The meaning of "significant" is sizable relative to overall trading volumes.

In the case of the Winklevoss Bitcoin Trust, the Bats BZX had entered into an information sharing agreement with the the Gemini Exchange, a New York-based bitcoin exchange that allows for spot trade. However, the SEC has decreed that this agreement is not sufficient to meet its requirements. The SEC maintains that bitcoin trading is dominated by unregulated non-US exchanges (like Binance). In this context, Gemini accounts for only a small fraction of global bitcoin trading, and therefore if a manipulation attempt were to succeed in causing a large change in the price of bitcoin, it would likely be carried out on a dominant exchange, like Binance, and not Gemini. Thus, an information sharing agreement with Gemini simply won't be effective for sniffing out manipulators.

A quick perusal of Coinmarketcap.com, a website that tracks bitcoin trading statistics, confirms that unregulated non-U.S. bitcoin exchanges dominate bitcoin trading (see screenshot below). On 31 August 2018, for instance, Gemini ranked 74th in terms of 24-hour bitcoin volume, at $18 million, whereas Binance clocked in near the top at $295 million.

Exchanges with the most bitcoin spot trading

Nor is the existence of information sharing agreements with a regulated bitcoin futures market sufficient to change the SEC's opinion. This is relevant because two large U.S. futures exchanges, the CBOE Futures Exchange (CFE) and CME, both launched trading of their bitcoin futures contracts in December 2017. Given that an information sharing agreement between the NYSE and NYMEX was sufficient to allow GLD to list, would an equivalent agreement between Bats BZX and either of these two futures exchanges constitute enough support for the Winklevoss Bitcoin Trust to proceed? Not so, says the SEC. In the case of other commodity ETFs like GLD, the SEC had sufficient evidence that the U.S. futures market for that commodity was large enough to be "significant." Regulated bitcoin futures still constitute a relatively unimportant part of overall bitcoin trading.

This logic used by the SEC needn't just apply to bitcoin. It might explain why there is no rhodium ETF in the U.S., for instance, whereas there is one in both Europe and South Africa. Since there is no exchange that offers rhodium futures and the spot market is relatively opaque, it would not be possible for an SEC-regulated exchange to set up the information sharing agreements necessary for SEC approval of a rhodium-based financial product. This echoes what I said at the outset: the SEC's decision is less about bitcoin and more about grappling with the complexity of market structure in an age in which financial magicians are trying to package everything into an exchange-traded product.

Dissent within SEC: underlying asset out of scope?

Interestingly, one of the four SEC Commissioners, Hester Pierce, dissented from the regulator's decision to disallow the Winklevoss Bitcoin Trust to be listed. Her reasoning is that a reading of Section 6 of the Exchange Act does not permit the SEC to focus on the underlying market for a proposed security, whether that underlying market be the bitcoin or gold spot market. Pierce believes the SEC only has the right to regulate the market for the overlying asset, i.e. units of a Bitcoin ETF or a Gold ETF. Pierce has previously advocated a Hayekian view of markets, in which the dispersed nature of information leaves no roll for a single "omniscient" regulator:

"Regulators are people, and they are people without great access to information, so we're asking them to do a task that they're destined to fail at... not because they don't have good intentions and not because they don't work hard... they do... they're hard working people but they're just not going to be able to succeed at the task."

Pierce's criticism would constitute not just a roll-back of the SEC's bitcoin decisions, but would also throw out a decade or two of previous SEC decisions related to information sharing practices of proposed commodity-linked ETFs.

The next Bitcoin ETF - Further rejections likely

The next big bitcoin ETF that is slated for an SEC decision is the CBOE Exchange's proposal to list the VanEck SolidX Bitcoin Trust. Given that Pierce's dissent is unlikely to sway the three remaining SEC commissioners, I don't expect this ETF to be approved. Let's look at the part of the proposal that has to do with information sharing agreements:

From VanEck SolidX marketing material (source)

The creators of the VanEck SolidX Bitcoin Trust point to a number of information sharing agreements into which the sponsor, the CBOE, has signed (or expects to sign). We already know that those with the CME, which lists bitcoin futures, and Gemini will not be sufficient to establish significance. What about the agreements signed between the CBOE and Bitcoin over-the-counter trading desks? The creators claim that the relevant OTC markets account for around US$250–$500 million in trading per day. But with overall exchange-related bitcoin volumes said to come in at around $4 billion per day, it will be difficult for the creators to prove that OTC trading constitutes 'significant'.

Lastly, the creators of the trust point to "other USD-bitcoin spot markets." I interpret this to mean that they may succeed in getting other U.S.-based bitcoin exchanges to join Gemini in sharing information. But if it can't get some of the largest actors in the list above, say Binance, Bitfinex, or OKEx, all of which are based outside of the US, it's hard to see how the SEC will provide its stamp of approval.

Bullion Banking 101 – Speech by BullionStar CEO, Torgny Persson

The following speech, by BullionStar CEO Torgny Persson, was given to an audience during a Precious Metals Seminar held at BullionStar's shop and showroom premises in Singapore on 19 October 2016.

BullionStars CEO Torgny Persson Precious Metals Seminar at BullionStarBullionstar shop during precious metals seminar Precious Metals Seminar at BullionStar


What have I got here?

It’s 87 grams of gold.

As many of you know, we have our own bullion vault integrated in BullionStar's bullion centre here in Singapore. What if I told you that every day we sell 6 kgs (6000 grams of gold), meaning that we sell about 1500 kgs gold per year to customers storing with us, but that we actually only keep 87 grams of gold in storage as reserves.

You would call it fraud and have me arrested, right? I’m obviously running a Ponzi scheme with very small fractionalised reserves backing up huge trading of unallocated paper gold.

Now, for clarity, that's not how we conduct business. When you buy and store bullion with BullionStar, your bullion is fully allocated and you can withdraw your metals at any time by just walking into BullionStar's bullion centre. You don’t even have to notify us beforehand.

What I just explained to you is something else - it’s bullion banking per definition - more precisely it’s unallocated gold trading by bullion banks.

As most of you know, the London Bullion Market Association (LBMA) has held its annual Precious Metals Conference in Singapore over the last two days. The LBMA is at the core of the world’s bullion trading system, a system which generates extremely large trading volumes every trading day. To understand the gold market, one has to understand the LBMA system as it is of great significance to both the price of gold and also to the physical movements of gold around the world. I will therefore provide you with an introduction to bullion banking and this LBMA system, and talk about how bullion banking operates.

Bullion Banking - Unallocated Gold

Almost all gold traded in the LBMA system today is in the form of unallocated gold which is accounted for in unallocated accounts. The definition of an unallocated gold account, as we can read on the LMBA’s website, is that the holder of such an account with a LBMA bullion bank does not have any ownership interest in any specific gold bars.

Instead, the account holder is merely an unsecured creditor of the bullion bank and holds a claim on the bullion bank for an amount of gold. At the same time, the bullion bank has a liability to this customer for this same amount of gold. Therefore unallocated gold is essentially paper gold. It is gold that doesn’t exist in the physical realm.

The creation of unallocated gold is in fact very similar to how fiat currency is created in the fractional reserve banking system. The fractional reserve banking system provides a good gateway into understanding bullion banking.

How is Fiat Money Created Today?

Let’s quickly recap on how fiat money is created in the fractional reserve banking system.

Money is created out of thin air. When a bank extends a loan, the money is created out of thin air.

Let’s take an example:

1) Robert plan to buy a house for $1 million.

2) Robert goes to a bank and the bank takes a look at Robert and deems him credible. With today’s low lending standards, it is rather easy for Robert to secure a loan. The bank deposits $1 million into Robert's account.

3) Where does this $1 million come from? The answer is 'nowhere'. It doesn't come from anywhere. The money is created out of thin air when loaned out to Robert.

This is easy to understand but hard to believe for some people. But it is true that this money is created out of thin air and lent into existence. About 92% of our money today is lent into existence in this fashion.

Banks keep a very small amounts of money in reserve to cover withdrawals, but they face liabilities which are far larger in size that their reserves.

The term "loan" as used in banking has been corrupted and twisted by banks. When a bank extends a loan, there is nothing loaned. To loan something you need to be in possession of it first, but when banks make loans, there is no countervailing transaction - The money is just created when the loan is extended.

How is Paper Gold Created?

Now, what about gold? How is gold created? You might say gold can’t be created, it has to be mined, right? Yes, you would be correct, physical gold cannot be created, but gold as an investment product definitely can be created and is created on a massive scale.

When a bullion bank customer goes to the bank and requests to buy gold, the standard procedure is for the bullion bank to create unallocated paper gold and credit this paper gold to the customer’s account. This ’gold’ is simply created out of thin air as a book-keeping entry in the bank’s accounting system.


Similarly, if actual physical gold is deposited into an unallocated account operated by a bullion bank, this deposit of gold is also in fact very similar to a deposit of fiat money. Just as a bank keeps deposited fiat money on its own balance sheet, a bullion bank keeps deposited physical bullion on its own balance sheet.

Bullion banks don’t generally safeguard or segregate gold deposited with them or held by them unless they are specifically instructed to do so if a customer opens an allocated gold account.

This means that depositors of gold into bullion banks' unallocated accounts are no longer the legal owners of the gold that they have deposited. Instead, they are just one of the general creditors to the bank, and they merely hold a claim for gold against the bank.

By depositing gold into an unallocated account at a bullion bank, you therefore lose ownership of your gold in return for a mere claim on gold.

Trading in unallocated gold by the bullion banks is thus based on book-keeping entries denominated in gold. The gold is fractionally reserved. Gold is created out of thin air as book-keeping entries in the banks' ledger systems, and even gold that is deposited into an unallocated account becomes the property of the bank.

LBMA Unallocated Gold Trading Volumes

From the LBMA’s published clearing statistics, which is one of the only transactional statistics that the LBMA does publish, we know that 600 tonnes of gold are "cleared" in the London Gold Market each and every trading day. Cleared means that it’s 600 tonnes of gold that's transferred between participants after netting out all trades between all trading participants.

According to a LBMA gold trading survey conducted in 2011 (the last such survey), the ratio between trading turnover and clearing on the London Gold Market was about 10 to 1. This means that the total amount of gold traded in the LBMA system each day is about the equivalent of 6,000 tonnes!

In other words, almost twice as much gold is traded in the LBMA system in a single trading day than is physically mined globally during an entire year.

LBMA Unallocated Gold Trading Volumes

But what is backing this 6,000 tonnes of unallocated gold traded each day, or 1.5 million tonnes of gold traded each year?

Let’s take a look at the reserve side of bullion banking in the LBMA system.

Bullion Bank Gold Reserves

The LBMA bullion banks' outstanding gold liabilities, and the unallocated trading system in the London Gold Market are ultimately backed by a quantity of 400 oz Good Delivery gold bars.

However, bullion banks don’t really want to hold physical gold. They will buy it if someone forces it on them but bullion banks have no real need for physical gold and are therefore incentivised to keep as little gold as possible in reserve, and lend out the gold they hold in reserve so as not to incur storage fees and handling costs. Banking reserves are looked upon as a dead asset so the banks minimise these reserves and try to make them into live assets by loaning them out.

When a bullion bank receives a gold bar by buying or borrowing it, it either sells, leases or allocates that bar elsewhere.

This sets a bullion bank apart from any other bullion entity because a bullion bank can hold deposits of gold on its balance sheet as assets even if it no longer has, or never had, the actual physical gold in its possession.

How much backing is there for all the unallocated gold traded in the LBMA-system?

We don’t exactly know as there are no reserve figures published but we can make an educated guess.

Vaulted Gold in London

How much gold is actually vaulted in London? The LBMA recently said on its website that there was approximately 6,500 tonnes of gold stored in London, about three-quarters of which was at the Bank of England. The Bank of England recently revealed that it was custodian for 4,734 tonnes of gold in its vaults.

This would leave 1,766 tonnes of gold privately stored in the LBMA vaulting system outside the Bank of England.

BullionStar research recently calculated (30 September 2016) that ETF gold holdings held in London accounted for 1,679 tonnes. This would mean that there are only 1,766 - 1,679 = 87 tonnes of gold in the LBMA system which is not allocated to ETFs!

Therefore, nearly all of the LBMA reserves are allocated to the ETFs with only 87 tonnes of gold left to back up the vast amorphous of unallocated gold trading amounting to 6,000 tonnes per day or 1.5 million tonnes per year!


Chart layout inspired by GoldChartsrus /Nick Laird. Data gathered by Goldchartsrus/BullionStar's Ronan Manly

Physical gold in the LBMA bullion banking system is therefore like physical cash in the monetary system. It is rarely seen!


Double-counted Reserves

LBMA is a banking system that by definition is based on fractional reserve banking.

HSBC, JP Morgan and ICBC Standard Bank are the only LBMA bank custodians with their own precious metals vaults in London. Most of the circa 42 LBMA bullion banks don’t even have their own gold vaults but still keep books denominated in gold ounces. A bullion bank without a gold vaults instead holds its gold reserves with a bullion bank that does have a gold vault.

For example, if Citibank keeps its reserves with a bank with a vault such as JP Morgan, then Citibank merely holds a gold claim for which JP Morgan has a gold liability. These unallocated gold reserves are therefore just pooled with the bullion banks that do have vaults.

The bullion banks without a vault never see or touch the metal they keep in reserves. If a bullion bank stores its gold reserves at another bullion bank’s vault, this means that the reserves are unallocated credits/claims which are standing behind the bank’s own liabilities. So even the reserves are fractionalised. So not only are bullion banks’ liabilities to their customers unallocated, even the reserves are unallocated inter-bank liabilities which are fractionalised.

Paper gold thus stands behind the liabilities of paper gold.

The LBMA system serves as a pool of reserves and uses coordinated reserve management where the different participating bullion banks can loan and lend to each other the few physical reserves that there are in the system so as to meet any demand for physical bullion.

Gold Bank Run

The bullion banks face massive liabilities in the form of unallocated gold credits. Bullion banks are thus, just like normal banks, susceptible to bank runs.


The difference between bullion banks and normal commercial banks is that whereas central banks are the ultimate lenders of last resort to commercial banks, most central banks no longer back-stop bullion banks as the lender of last resort because most central banks no longer sell or lease bullion that can be used to prop up bullion banks' reserves.

In case of the LBMA, the central bank is replaced by a private company called London Precious Metal Clearing Limited (LPMCL) which is run by 5 clearing bullion banks and whose clearing system AURUM nets out all gold claims and liabilities in the LBMA system. The clearing system functions as a pooled system in that only net balances are cleared and the bullion banks' gold reserves are essentially pooled and can be leased and double counted whenever necessary.

When they no longer have any physical gold to deliver, the ultimate rescue plan for bullion banks is to use cash settlement instead.

In the same way that banks increasingly promote cashless solutions as a means to reduce cash handling costs, earn credit card fees, reduce the risk of bank runs and lock in customers, LBMA system bullion banks promote gold-less gold transacting.

Just as the banking system inherently incentivises reckless debt behavior, the bullion banking system inherently incentivises the reckless creation of paper gold assets.

LBMA – The Paper Gold Protector

In creating artificial paper gold, bullion banking protects the fiat money system.

If even a small minority of the paper gold traded today was backed up by physical gold, the price of gold would have skyrocketed. A gold price significantly higher than today would point towards the inferiority of the fiat money system, and possibly the collapse or implosion of the current monetary system.


Bullion banks and gold industry organisations, such as the LBMA and the World Gold Council, which itself has developed and owns securitized gold products, can profit from gold trading volumes that are far higher than they would be if they were limited to the constraints imposed by the availability of physical gold to trade.

The bullion banks and the LBMA work hard to overcome the tangible limitations of physical gold mining. By promoting gold-less gold transacting, the LBMA unallocated system artificially increases the supply of gold, earning the banks higher fees from artificially large trading volumes.

To reiterate, the LBMA unallocated gold trading is a banking system based on fractional reserve banking which is all about exposure to the price of gold but not to gold itself.

The LBMA system is used to coordinate unallocated paper gold trading where ‘gold’ is created out of thin air, and the tiny physical reserves held are pooled and shared out among participants so as to minimise costly reserves and avoid gold bank runs.

When bullion banks need to allocate gold to the ETFs, such as to the SPDR Gold Trust (GLD) in London, they use credits from the same unallocated gold credit system as was previously used to offset other gold liabilities. Even though the ETF may own the gold outright, the gold is still being double counted within the system because its being allocated out of a bullion bank pooled systems of credits.

To summarize what the LBMA is all about, it is a paper gold protector for the bullion banks which allows the bullion banks to earn fees from an artificially high trade turnover while at the same time protecting the fiat currency system.

The Guarded Secret of no Gold

The fractionally-reserved bullion banking system is a fragile system. Many investors and savers holding paper gold believe that the gold they are holding is backed up by real physical gold. But if the bullion banking system implodes, which it will do if the high demand for real physical gold in Asia is sustained at anywhere near today’s levels, these holders of paper gold will at best end up holding paper claims which will be cash-settled, or at worst these paper gold holders will be empty-handed.

Demand for ETF’s and unallocated gold will likely not stress the system systemically since the pooled LBMA gold reserves are used for leasing and double counting. It is the demand for real physical gold, draining bank gold reserves, that stresses the system.

Many gold investors/savers buy various paper gold products as a means of protecting themselves against the fiat currency Ponzi scheme. It may therefore come as a surprise to some holders that these investments are no safer or even less safe than the fiat currency against from which they are seeking to protect themselves. Bullion banks give the impression that these investors into unallocated gold are actually holding gold, whereas in reality they are just unsecured creditors holding paper gold, gold that is created out of thin air, in a fractionally-reserved Ponzi scheme.

As long as everyone is happy to buy and sell ledger entries/book-keeping entries, this fragile system can continue to balance on a thin thread. The systemic problem arises when larger entities start to demand physical delivery, a trend which has been happening in the last few years, most notably in Asia and Russia. There is therefore an imminent risk of the bullion banking system collapsing in the next few years.


This is an accident waiting to happen, because when enough holders of paper gold ask for delivery, the default that will follow will trigger the biggest bank run for gold in history, which due to gold’s significance as a monetary proxy, will shake the entire monetary system.

When there is no longer any physical metal to deliver, the ensuing shortage will result in a disconnect between prices, in which paper gold will become worthless while the price of real physical gold will be revalued at a much higher level based on the market equilibrium for physical supply and demand of gold.

Thank you!