Wilshire Phoenix Proposes Exchange Traded Product (ETP) to the SEC to Hedge Bitcoin with US T-bills
The SEC has received multiple applications for Exchange Traded Product (ETF) to be listed on the New York Stock Exchange (NYSE). However, it has been delaying these decisions since at least the middle of last year for many of the companies that have tried to gain the listings.
This is despite the Commissioner of the SEC coming out in support of cryptocurrency and Bitcoin in particular during a recent keynote address at the Consensus Summit 2019. This has lead to many asset managers trying to find new and innovative ways to bring cryptocurrency to retail investors via physical exchanges such as the NYSE.
Upstart looking to T-Bill hedging as a solution
This is where Whilshire-Phoenix comes in. A small, some would say upstart, asset management firm thinks it has found the secret to getting SEC approval and it revolves around minimizing risk by bundling Bitcoin with various other instruments.
These are notably Treasury Bills and the product uses a proprietary formula to be able to entice larger investors who are looking to dip their toes into the Bitcoin craze. However, these same investors do not want to deal with the inherent instability that permeates the crypto market.
The fund, whose full name is The Wilshire Phoenix United States Bitcoin and Treasury Investment Trust, filed an S-1 with the SEC in January already. An amended proposal as submitted on the 21st of May and it proposed this new ETP model. The new model would group Treasury bills (T-bills) with Bitcoin. Coincidentally, NYSE Arca filed with the SEC to appeal for a rule change that would allow them to list ETPs on their exchange.
IT is a sign of the times that various companies have started looking into releasing Bitcoin-related products such as ETPs and ETFs (Exchange Traded Funds).
VanEck and Bitwise have both applied with little success, as their proposals have been stalled time and time again. The reasons given for the stalling tactics was for the SEC to garner public comment on both the stability and volatility concerns regarding investing into Bitcoin.
Finer details emerge
The ETP would be backed by Coinbase's Custody program that is insured up to 200 million dollars. It would combine this with short term treasuries and cash equivalents that would be held by the UMB Financial Corporation.
The success or failure of the application hinges on the hedging of Bitcoin (high volatility) versus T-bills (low volatility). The fund's formulas dictate how much is invested at any given period.
During periods of high volatility, a smaller portion of the fund would be invested into Bitcoin, whereas a much larger portion would be added in periods of low volatility. The beginning of each month would see a reallocation of funds based on the data gathered the previous month – thus allowing for some stability in a market where it has not been seen… ever.
The situation as it stands currently is that the SEC has 45 days to give an answer to Wilshire-Phoenix. An approval from the SEC would see the retail shares traded on the New York Stock Exchange Arca, giving a much wider (and richer) audience to cryptocurrency.
The fine print is interesting as well. The SEC has never approved a 19(b)-4 crypto mutual fund and that is in part due to the lack of control over the NAV (Native Asset Value) of cryptocurrency based funds. However, when looking at combined holdings, particularly when it comes to being grouped with T-bills.
The company believes that the stumbling block in the past has been the ever-present volatility factor and the company likewise believes that it has managed to solve that problem.
Many in the financial and crypto world think that the SEC would be loath to give any cryptocurrency product an approval, no matter how small of a percentage it would be. Wilshire-Phoenix spokespeople couldn't comment on this as they are not allowed to speculate at this point of the proceedings but they do assure that they are in constant contact with the SEC.
The method they are using, however, isn't just applicable to crypto. The reorganization of assets on a monthly basis and the formulas used to calculate the reorganization are currently waiting on a patent. This method allows a much greater control over the NAV of the product, as well as shifting the cost of rebalancing value from the customers to the fund itself.
This is done by using the interest gathered by the T-bills to pay for a portion of the rebalancing. If successful with Bitcoin, the fund will be looking to apply this method to other asset classes very soon.