The Ontario Securities Commission (OSC) published a document Wednesday detailing Commissioner Lawrence P. Haber’s reasons to overturn the commission’s previous decision regarding 3IQ Corp and The Bitcoin Fund. A preliminary prospectus for the public offering of this fund was filed with the OSC’s Investment Funds & Structured Products branch (IFSP) in October last year. However, in February, the IFSP refused to issue a receipt of The Bitcoin Fund’s prospectus after its staff raised a number of concerns.
A commissioner of the Ontario Securities Commission (OSC) has debunked the arguments against bitcoin used to deny the public offering of The Bitcoin Fund. Among others, the commissioner rules that bitcoin is neither illiquid nor more susceptible to manipulation than other commodities, real volume and real trading in bitcoin exist, and it is not the role of securities regulators to approve or disapprove of the merits of bitcoin.
Director’s Refusal Axed, Fund Green-Lighted
3IQ Corp and The Bitcoin Fund subsequently applied for a hearing and a review of this decision. After multiple hearings, Commissioner Haber ruled on Tuesday that the staff’s concerns “do not warrant denying a receipt for The Bitcoin Fund’s prospectus” and ordered the IFSP director’s decision to be set aside and a receipt for a final prospectus of The Bitcoin Fund issued. Unless the staff can find new grounds for refusal, the final prospectus can be used to offer securities to the public.
Canadian investment fund manager 3IQ Corp. confirmed Wednesday that “it has received a favorable ruling” from its public hearing before an OSC panel regarding The Bitcoin Fund. The fund will be a public, non-redeemable investment fund that will invest all of its assets in bitcoin. 3IQ, which also manages a private crypto investment fund, will be The Bitcoin Fund’s investment and portfolio manager.
Not Our Job to Decide the Merits of Bitcoin
In the document, Commissioner Haber addressed every concern raised by the IFSP staff. He began by stating that this case “is not about the merits of bitcoin as an investment” because “It is not the role of securities regulators to approve or disapprove of the merits of securities being offered to the public.” He pointed out that all prospectuses filed in Canada even say on the cover page that “No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise.” The commissioner remarked:
It is also outside the scope of the authority of securities regulators to immunize investors against risk or against loss. And, it is not the job of securities regulators to ban speculation or risk-taking.
The document further explains that while bitcoin is “a novel asset in an emerging and evolving market,” it can later mature and change significantly, adding that although some assets in this class fail and become tulip bulbs, others can become gold and the next generation of technology. “Securities regulators are not mandated to try to pick winners and losers,” the document details.
Bitcoin Is Not Illiquid
As a key reason for rejection, the IFSP staff submits that “Bitcoin is an illiquid asset … Therefore, by holding bitcoin, the fund would not comply with the restriction against holding illiquid assets set out in section 2.4 of NI 81-102.” Commissioner Haber disagreed. He said: “I do not agree with Staff’s submission … I find that Staff has not shown that bitcoin is an illiquid asset, as defined in NI 81-102,” emphasizing:
I find that there is sufficient evidence of real volume and real trading in bitcoin on registered exchanges in large dollar size, both in absolute terms and compared to other markets for commodities and equities, which constitutes a liquid market.
The commissioner referenced some existing investment products providing exposure to bitcoin such as Grayscale Bitcoin Trust (GBTC) which is available to Canadians.
The IFSP staff also decided that it is not in the public interest to issue a receipt for the fund’s prospectus due to concerns about its “ability to value its assets for investors given the significant market integrity concerns regarding the trading of bitcoin,” “the security and safekeeping of the fund’s bitcoin,” and “the fund’s ability to file audited financial statements, as required.”
Regarding price manipulation associated with crypto assets, Haber concluded that the staff “has not established that the fund will be unable to arrive at a net asset value that satisfies the requirements of NI 81-106.” While acknowledging the existence of fake volumes and unregistered market trading, the commissioner said the “Staff has not proven that true price discovery in the bitcoin market is prevented by insufficient ‘true trading’ or price manipulation, at least on the regulated exchanges.” He added that the evidence presented to him suggests that wash trading and fake volume are used primarily to attract more traders and issuers, and “did not establish systemic and sustained manipulation of the price of bitcoin.”
The commissioner also placed weights on the steps taken by the company to mitigate the risks of manipulation such as its selection of MVIBTC as the index and the fund’s non-redeemable structure. He also noted that other bitcoin holdings, such as GBTC, have been successfully valued, adding:
It is worth noting that bitcoin is a commodity, not an equity or other security … The risk of market manipulation exists in all commodity markets. Many of Staff’s stated concerns could apply equally to other commodities, such as precious metals or foreign currencies. Staff did not persuade me that bitcoin is more susceptible to manipulation than other commodity products.
Regarding custodian and security risk, the commissioner said, “Like any valuable commodity, I accept that bitcoin can be stolen or lost.” He conveyed that the staff did not establish that the fund’s custodians do not follow sufficient practices for safeguarding bitcoin. Commenting on New York-based Gemini Trust Company which will act as a custodian of the fund’s bitcoin, Haber opined, “I am not persuaded that there was sufficient evidence that professional, regulated crypto-asset custodians, like Gemini, have suffered losses of customer assets.”
Staff’s Lack of Authority
Commissioner Haber also disagreed with the staff’s submission that investor protection extends to the assets the fund proposes to hold or the markets in which they trade. He explained that if the staff’s analysis were to apply to The Bitcoin Fund, then “it would amount to a ban on any funds holding bitcoin, regardless of their structure or management.” Furthermore, he pointed out that “the length of Staff’s proposed ban would be uncertain,” emphasizing that the ban would effectively remain in place until the staff’s concerns have diminished, elaborating:
Staff has not provided any authority for imposing such an indeterminate ban.
Since investors have other means of acquiring bitcoin, the commissioner questioned how the staff’s proposed ban would protect them from “unfair, improper or fraudulent practices.” On the contrary, he expects it will ensure that investors could not invest in bitcoin through a public fund, reiterating:
Denying investors the opportunity to invest in bitcoin through a public fund would not promote fair and efficient capital markets and confidence in capital markets.
“Instead, it would suggest that investors should acquire bitcoin through unregulated vehicles, and capital market participants should be encouraged to create those vehicles,” the commissioner opined. He believes that “The issuance of a receipt for the final prospectus of the fund would promote efficient capital markets by creating an alternative to GBTC,” which he noted is available to Canadian retail investors but trades at a significant premium to its net asset value. It would also “promote efficient capital markets by giving retail investors a means of diversifying their investment portfolios through access to an additional uncorrelated asset class,” the commissioner concluded.