The Winklevoss Bitcoin Trust, a proposed exchange-traded fund based on Bitcoin, made several changes to its regulatory filing with the Securities and Exchange Commission Tuesday that further legitimize cryptocurrencies as investable assets and also take advantage of unique capabilities of the technology underpinning them. It also further distinguishes itself from another filing for a Bitcoin ETF by cryptocurrency and blockchain firm SolidX.
The amendment, the seventh in twin brothers Tyler and Cameron Winklevoss’s three-and-a-half year quest to offer the public a Bitcoin ETF, states that the trust, to be traded under the ticker symbol COIN, has signed on, as administrator, the storied and conservative 224-year-old State Street. In that role, the bank will oversee the back office mechanics of the ETF, such as issuing shares.
With $28 trillion in assets under custody, the second-oldest financial institution in the United States is undergoing a strategic shift to embrace technology. Still, the fact that the bluechip firm is lending its imprimatur to Bitcoin marks a step forward for a cryptocurrency still largely associated in public consciousness with illicit activity online.
Another update is that the trust will use the daily price from a recently launched end-of-day auction held on the Winklevoss brothers’ cryptocurrency exchange, Gemini, to provide the NAV (net asset value) of the ETF.
The auction, similar to those held for other, more traditional, asset classes concentrates liquidity into a 10-minute time frame and results in an end-of-day price that can also be used for, say, accounting purposes.
The amendment also notes that the auction has substantially increased Gemini’s volume, indicating that the exchange, while not as established as some of the bigger and older cryptocurrency exchanges such as Coinbase’s Global Digital Asset Exchange, is growing. On average, at the moment of the auction, it accounts for 16% of all U.S.-based Bitcoin volume, and it has helped increase Gemini’s market share to 9% of all USD-BTC exchange-traded volume.
In the filing, the Winklevoss brothers confirmed that San Francisco-based accounting firm Burr Pilger Mayer (BPM) has been named auditor; it has experience working with a number of venture-based cryptocurrency companies.
Part of BPM’s duties will include conducting a monthly proof of control that demonstrates that Gemini, the custodian, does indeed control the private keys associated with its public Bitcoin addresses, and attest to its success. The monthly proof of control will be unique among similar ETFs. For instance, precious metal trusts cannot be audited in the same way to determine that, say, the gold bars are really there, whether they’re genuine gold. And if such trusts could be audited in that way, it would take years to prove it, whereas the Winklevoss Bitcoin Trust can prove their control of the private keys of the Trust’s Bitcoin addresses in a matter of minutes.
Though the proof of control only takes minutes, it requires someone to go to each cold storage site — a physical location holding the non-internet-connected hard disks or computers that contain the private keys -- so the process will be performed monthly. However, the balances will always be available in real-time.
“Custodian's Cold Storage System was purpose-built to demonstrate 'proof of control' of the private keys associated with its public Bitcoin addresses,” the filing states. “The Sponsor and the Custodian have engaged an independent audit firm to verify that the Custodian can demonstrate 'proof of control' of the private keys that control the Trust's bitcoin ('Proof of Control Audit') on a monthly basis.”
Finally, the amendment also offers further detail on one of the more noted differences between the SolidX filing and the proposed Winklevoss Bitcoin Trust: the issue of insurance. The SolidX filing proposes to have insurance that will cover the loss of bitcoin by theft, destruction, bitcoin in transit, computer fraud or hacking attack and other loss of the private keys.
The Winklevoss Bitcoin Trust, in contrast, has, since October 2015, had a form of insurance called a fidelity bond, as required by the New York Department of Financial Services since Gemini, the custodian of the ETF, is a New York State-chartered trust company. The filing states, “The Custodian's statutorily required fidelity bond coverage includes, among other things, insurance against employee theft, computer fraud, and funds transfer fraud; this coverage is subject to certain terms, conditions, and exclusions.” A fidelity bond compares favorably to precious metals trusts, such as the most popular gold ETF, GLD, which typically do not have insurance.
In late June the trust announced that it would trade on the BATS exchange, which has built a reputation for its technology, switching from Nasdaq, and last week, the SEC announced it was seeking more public feedback on Bitcoin’s stability and the trust’s method of valuing its holdings, among other issues.
Update, Tuesday October 18, 2:55pm: This post has been corrected to note that Gemini has a fidelity bond because of its status as a New York State-chartered trust company.
