The Winklevoss twins’ plan to launch an exchange traded product holding Bitcoins has been met with some over-the-top negative reactions from many financial journals and bloggers.
However, these commentators won’t be the ones who decide whether the proposed ETF is successful, or if it even launches.
That’s up to two unknown factors: the SEC and the Bitcoin market itself.
Make no mistake, the Winklevoss brothers and their expensive Wall Street attorneys are facing a seemingly uphill struggle with the SEC to get the Bitcoin ETF listed. Of course, they are no stranger to protracted legal battles after their famous lawsuit against Facebook founder Mark Zuckerberg. The eight-year Facebook litigation eventually resulted in a $65 million settlement.
The twins have tapped ETF expert Kathleen Moriarty, a partner at law firm Katten Muchin who has decades of experience getting products through the tricky regulatory process before they can launch. It can sometimes take years for the SEC to declare a product “effective,” so don’t expect an ETF tracking a virtual currency to come out anytime soon.
The future of this opaque and unregulated currency market itself is another wild card for the Winklevoss Bitcoin Trust.
‘Bringing Bitcoins to investors’
“The vision of the exchange traded product is to create a simple solution to the problem of buying Bitcoins if you don’t want to purchase and store them,” said Tyler Winklevoss in a telephone interview. “We want to bring Bitcoins to a broader group of investors that before couldn’t get easy exposure to the asset.”
Winklevoss and his brother Cameron reportedly own about 1% of the Bitcoin market, or roughly $10 million. Of course, that number fluctuates because Bitcoin prices can be extremely volatile.
Bitcoin prices fell to around $70 at one point last week after spiking as high as $266 in April.
When asked whether the brothers’ own Bitcoin stash would back the proposed $20 million trust, Tyler Winklevoss said they haven’t decided yet. Indeed, many of the ETF’s details have yet to be worked out, including the potential listing exchange, market makers and fees.
However, the filing does extensively outline the ETF’s potential risks. “It may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoins in one or more countries, and ownership of, holding or trading in Shares may also be considered illegal and subject to sanction,” according to the filing.
“We’re being very transparent on the risk factors,” Tyler Winklevoss said.
Next page: Twin ambitions and SEC hurdles
Twin ambitions
In the interview, he was also very upfront about the fact that if the ETF does eventually launch, it would likely boost the twins’ Bitcoin investment. They also have a stake in Bitcoin payment processor BitInstant.
“We don’t deny that we will rise and fall with the state of Bitcoin,” Winklevoss said, acknowledging they stand to reap monetary rewards if the ETF ever launches. “We put our money where our mouth is. We have skin in the game.”
He said the twins started researching Bitcoins last summer and thought the risks, although they certainly exist, were overstated because people didn’t fully understand the digital currency.
They started buying “in the high single digits” through exchanges, brokers and other avenues, but the process wasn’t easy.
“The media started to wake up to the story, but it was still tough to buy Bitcoins,” he said. “The exchange traded product was the solution we found to solve that problem.”
The market or trading “ecosystem” that lives on top of Bitcoins has to grow and become more user-friendly, he predicts.
“That’s the mission of the ETP. It makes it easier to get involved,” Winklevoss said. “People have said investors could just go out and buy Bitcoins themselves. But how many gold investors actually own a gold bar? This would democratize the ability to buy Bitcoin.”
Of course, if the U.S. government decides to outlaw Bitcoins, then all bets are likely off. But if Bitcoins become more accepted as a currency, the chances probably improve that the ETF could become a reality in a couple years.
Not discouraged by SEC hurdles
Winklevoss said the ETF filing will actually force the government, or in this case the SEC, to explore the idea of Bitcoins as a currency.
“Part of the whole project is to get regulators to come in and give some guidance,” said Moriarty, the Katten Muchin lawyer.
According to the filing, the sponsor and custodian for the proposed trust is Math-Based Asset Services LLC, which is wholly-owned by Winklevoss Capital Management LLC. The firm has a proprietary and patent-pending technology to administer the trust, including how the Bitcoins would be stored and safeguarded from “theft, loss, destruction or other issues relating to hackers and technological attack,” the filings explains.
Winklevoss said an ETP would give investors exposure to Bitcions by holding and trading ETP shares through their brokerage accounts in the same manner and subject to the same regulations as are other listed securities. The product would live on an exchange, and provide high transparency and liquidity, he said. Also, the product could provide price discovery and real-time prices for the currently decentralized Bitcoin market.
Bitcoins are about four years old but the trading system and entrepreneurs are still young. The ETP solves some of the problems, Tyler Winklevoss said.
“We believe that Bitcoin demand is there. We’re focused now on getting the product through the SEC. After that, we have to prove to investors that we have reduced the friction and solved the problems related to buying Bitcoins, and the security risk that keeps them up at night in terms of storage,” he noted.
Going back to the SEC regulatory process for ETFs, the twins may want to prepare for some sleepless nights of their own.
“We’re not discouraged,” Winklevoss said.
John Spence contributed to this story.