Narratives and reality

Catching up on reading from last week, I came across an article in the FT by Izabella Kaminska, who takes issue with economic impatience.

“While there is little doubt that too much short-termism has negative effects, one should not assume that it follows that extreme long-termism is always for the best. The latter can be dangerous when long-term thinkers fall for fanciful narratives or investor cults.“

She goes on to say:

“Nowhere is this mindset more clearly displayed today than in the realm of cryptocurrencies, where narrative trumps reality on a daily basis. “

To claim that happens daily is a stretch. But overall, maybe she’s right – the cryptocurrency space is full of hype and idealism, which doesn’t last long when the window of righteousness is opened and the obstacles of modern life rush in.

Although, the claim doesn’t make sense. The problem is with the definition of “reality”. No-one seems to have a clear idea of what it is anymore.

I’m not even sure if that is possible – because isn’t reality what we say it is? And these days, with so many channels of communication available to us, to import and export, reality is a mish-mash of interpretations, theories and facts distorted by bias.

We all have our own version of reality. My reality is not the same as a Texan truckdriver, Syrian teenager, or Nepalese grandmother. Nor can it ever be. So if “narrative trumps reality”, which reality are we talking about?

What’s more, as Yuval Noah Harari points out in his seminal work Sapiens, narrative is not only the unifying force of societies – it also creates its own reality. The forging of common myths bound groups together in imagination and tradition, giving us the internal organization necessary to conquer and invent. Objective reality is the ground we stand on, the bricks that house us and the food that nourishes. Subjective reality is our interpretation of their meaning, our understanding of our purpose and our determination of “obvious truths”. Narrative breeds subjective reality.

“Large numbers of strangers can cooperate successfully by believing in common myths. Any large-scale human cooperation – whether a modern state, a medieval church, an ancient city or an archaic tribe – is rooted in common myths that exist only in people’s collective imagination.”

So, “narrative trumping reality”? It’s a great soundbite. But is isn’t true. Narrative creates reality.

The history and future of money on display

I’m just back from a trip to London without my computer (hence the silence). While, there, I paid a visit to the British Museum for the first time in ages. I remembered the imposing façade, but had not seen the luminous inner court that makes you feel like you’re floating in light. I found myself doing laps in a sort of daze… And it was only morning.

Peeling off into the gloom of history, I came face to face with a surprising combination of permanence and progress that layers cultures on top of and next to each other, creating an incongruous sense of continuity. An ideal way to feel small and yet part of something important.

british museum

My main objective was to check out the History of Money exhibition, sponsored by Citibank. The room is small but packed with information, examples and anecdotes. The displays are intriguingly split down the middle into “The history of money” and “The history of coinage” – most attempts at synthesising the timeline conflate the two.

early coins

I confess that I had assumed that coins were tokens representing money. According to the curators, it turns out I was wrong – only metal tokens classify. The cowrie shells used in China are on the “money” side of the room (an interesting detail: the Chinese word for shell – bei – is still used to talk about money today).

Yet we refer to digital currencies as “coins”. The official definition (according to Google, of course) agrees with the curators, that coins are metal. Merriam Webster takes a broader view, allowing a coin to be “something resembling a coin especially in shape”, or “something used as if it were money (as in verbal or intellectual exchange)”. I’m on the side of the broad definition. But this is worthy of debate.

cowrie shells

There is so much in the history of money that points to what money could look like tomorrow. The earliest coins (minted around 650BC in Lydia) appear to have been “authorised” by the king (central authority). But the system didn’t hold for all cultures, and in the 1600s, London saw the issuance of local, business-specific tokens exchangeable for coffee, ale, fruit, etc.

We worry today about our ability to manage a host of different tokens. But back then, without electronic wallets, people seemed to manage. True, this was during a time when the government had stopped issuing small change, so there was a market opportunity (and not much alternative). But still, it speaks to our ability to organise when there is incentive to do so.

business tokens

Also on exhibit was the first global currency: the silver eight-reales, or “pieces of eight”, which later became the basis for the dollar. Issued by the Spanish empire from the end of the 16th century, they became the standard trade coins for most of Europe and Asia.

While it wasn’t the only currency in circulation at the time, it shows that a virtual alternative could end up accepted around the world for a specific purpose. Could this point to global acceptance of a niche use for bitcoin, or perhaps a specific use-case cryptocurrency?

british notes

There is so much more to unpack from the exhibition, which warrants further study. For instance, how even in some euro countries, more than one currency circulates. Did you know that in Northern Ireland some commercial banks have the right to issue bank notes, even today? And it turns out that the islands of Jersey, Guernsey and the Isle of Man issue their own versions of the British pound.

In a stroke of coincidence or perhaps insightful intent, the Money gallery is right next to another whose concept is also based on a fundamental innovation in measurement: clocks and watches. The idea of standard measures for the passage of the abstract idea of time is as fundamental to our modern world as that of measuring value and debt. Food for thought.

Is bitcoin money?

by Ondrej Supitar via StockSnap
by Ondrej Supitar via StockSnap

I’m currently reading “Money: The Unauthorised Biography” by Felix Martin, which I thoroughly recommend. Thought-provoking, illuminating and beautifully written, it debunks our preconceived notions and highlights the surprising evolution of this social technology that we use every day.

In the first chapter, Felix explains that the coins and notes that we carry around are not money. Money is the system of credit and debt that is sometimes represented by circles of metal and rectangles of paper. But usually not – most transactions are not represented by anything physical.

Rather, coins and notes are tokens that help us keep track of debts. The big innovation was to start exchanging those debts for others. Frank owes me, and here’s a token that represents that. I owe you, so here, take Frank’s token. Now he owes you. This conceptual leap is what kickstarted trade and the concept of an “economy”.

Looking back through history, that is what money has always been: a system of recording debts, and a representation of trust. That we associate money with coins is simply survivor bias – coins tend to weather the test of time better than other types of physical token.

One of my favourite anecdotes from the chapter is the siege of Malta. When the Turks cut off the fort from its supplies of gold and silver, the mint had to resort to making coins from copper – it inscribed each with the motto Non Aes, sed Fides – ”Not the metal, but trust.”

The system of recording that trust is what we call money.

Enter an entirely new way of recording that trust: bitcoin.

So, yes, bitcoin is a type of money. Perhaps not a currency – the online dictionary defines “currency” as “a system of money in general use in a particular country”. Since bitcoin is not confined to a particular country, that rules that out. (JP Koning points out that “currency” used to mean “something that could legally be used by the new owner if stolen”. So that would probably include bitcoin – but that definition has fallen into disuse, so we’ll go with the more modern one for now.)

According to the US Commodities and Futures Trading Commission (CFTC), bitcoin is a commodity. If you’re talking about bitcoin the coin, then yes, it could be. Commodities (gold, silver, cacao beans) have often been used in the past to represent money. BUT bitcoin is more than just a commodity, just as the euro is more than just copper coins. (Interestingly, paper – which also represents money – is not considered a commodity.)

And anyway, the CFTC ruling is mainly aimed at the regulation of derivatives, not so much at the use of bitcoin as money.

The topic is tangled, though. If bitcoin is a commodity (like silver), what makes it usable as money (like silver)? An official stamp of some sort – after all, monetary systems have always been controlled (or at least overseen) by a central authority. For the first time, we have a money that escapes the traditional parameters.

Also, commodities have always existed independently of the monetary system they move on (for instance, copper is not just used for money, knots on a string can mean something other than debt). Until now, anyway.

The confusion highlights the need for a new attitude. Maybe it’s time we updated not only our vocabulary but also our understanding of the monetary system. It’s not going to be easy.

Biases, barriers and bitcoin

I stumbled across a fascinating video this morning, about cognitive biases and money. Watching this, I realized that many of us bitcoin holders fall into the same trap.

The video talks about how we mentally segregate our “assets” into different compartments, which affects how willing we are to spend them. This is curious, since in the end it’s just money, right? And money is fungible, right?

So, why are we willing to spend some types of money and not others?

The video gives the eye-opening example of the movie ticket, the result of a study by renowned behavioural psychologists Kahneman and Tversky. If you go to the cinema and pay for a $10 ticket with a $20 bill, in exchange you get the ticket and a $10 bill. Now, say you lose the ticket. Do you buy another one with your remaining $10 bill? Most participants in the survey said no, they’d just go home.

But say instead the cashier gives you two $10 bills, and you are to hand in one of them to gain entrance to the theatre. If you lose one of the $10 bills, would you use the other one to see the movie? Most say they would.

This is notable, since the end result and cost is the same. (I think time and hassle should also be taken into account since they are an invisible cost, significant to some – but the point holds.)

Put any kind of barrier, even just one of form, between us and our money and we spend it less readily.

We all have things that we wouldn’t part with, even if it would get us in to see Hamilton. That’s because they have more than monetary value to us. They give us pleasure, they stimulate a memory, perhaps we know we couldn’t replace it easily… But a movie ticket? Not much sentiment attached there.

Now, sidestepping over to bitcoin, I have often pondered why some pundits point to bitcoin’s lack of acceptance in stores as a sign of failure. I couldn’t see the sense in spending something that you think might go up in price. You spend it, it’s not in your wallet anymore, and you lose out on the appreciation.

Through a different lens, I see now that that is totally stupid a narrow way of looking at things. And what’s more, misses the point of bitcoin.

It’s money. And it should be used. Holding onto it because “it’s bitcoin” denies it that use, which contradicts the interest that got us into the asset in the first place.

Plus, it might go down in value, so spending it now would be a good asset management decision. Or it might go up, but you can always buy more with the money that you would have used had you not used bitcoin. By using the cryptocurrency you perhaps saved money or time, so that would also have been a sensible decision.

But we’re not sensible, as Kahneman and Tversky – and all of us who prefer to hold bitcoin rather than spend it – show.

Most bitcoin these days is held for speculation. We buy it thinking it will appreciate in price. With that, from the beginning we are not regarding it as money. Those of us who buy in because we love the concept and we want to try out using it, end up falling victim to the rising market mentality of “can’t miss out on appreciation”. We stop seeing it as money and start seeing it as a ticket to riches.

We can offer in our defense the fact that merchants don’t take bitcoin. True, but take a look at the number of merchants who did and stopped because no-one was using it, or the number of merchants that don’t even bother because no-one is using it. It’s hard to deny that we are perpetuating the problem.

For bitcoin to reach its potential, it needs to circulate, and it needs to be used for more than portfolio diversification. The longer we let the current trend of market obsession continue and the longer we let our cognitive bias rule, the more we delay bitcoin’s debut as a global currency.

It’s strange how sometimes you can be searching for an answer to one question and end up understanding a completely different one a bit better.

Bitcoin, volatility and safe havens

So much for the “safe haven” theory…

Previous bitcoin bull runs have been accredited to turmoil and fear in financial markets. Much has been written about the cryptocurrency replacing gold as a “safe haven” (which I don’t agree with – it’s more of an “appealing alternative”), as pundits point to the jumps after the Brexit vote and the Trump election.

What, then, explains the bull run when Wall Street’s “fear index” is at its lowest point in over 20 years? Bitcoin is up 75% so far this year, and 26% so far this month. Among the reasons given are the increase in demand in Japan, in response to the recent legislation legalizing bitcoin as a “payment method” (but not yet a currency). The renewed possibility of a bitcoin ETF approval is also cited (although it is unlikely), although a stronger influence could well be FOMO (fear of missing out).

This is quite spectacular:

coindesk-bpi-chart

Maybe the “fear index” is wrong? Does anyone really believe that uncertainty and risk are at minimums?

The VIX index, as it is called, measures volatility. The assumption up until now has been that volatility = fear, and when things are going belly up, volatility peaks. What if volatility no longer measures fear? What if market liquidity, speed, derivatives and algorithms have ruptured the historical relationship?

I’m not a market expert, but I can’t see how volatility wouldn’t go up in times of trouble. So I find this completely perplexing.

One thing to bear in mind – just because bitcoin is not at this stage relying on its “appealing alternative” status, does not mean that it loses it. The fundamentals and characteristics that make it interesting have not gone away. It’s just that it has other good stuff going on.

Could a bitcoin ETF happen in the near future?

Now that the market excitement over the possibility of a bitcoin ETF seems to have been put to bed with the SEC rejecting both the Winklevoss and the SolidX proposals, it’s worth thinking about what needs to change for an official bitcoin investment vehicle to happen.

Forbes published today an interesting article by Moe Adham that unpacks the SEC decision. He pins the causes on two things:

    1) The lack of “surveillance-sharing agreements with significant markets”, in this case between the listing exchange (BATS) and a commodity exchange operator (Gemini, which does not have a significant market position). The concern is that the market insignificance of the exchange on which the underlying asset will be traded could leave it vulnerable to manipulation.
    2) The Gemini Exchange is not regulated enough (it is, though, one of only two regulated bitcoin exchanges in New York – but apparently that’s not enough).

Moe then goes on to hypothesize on what would need to happen before a US-listed bitcoin ETF is approved:

    1) The majority of bitcoin trading needs to happen on US-based exchanges.
    2) US-based bitcoin exchanges need to be regulated.

I agree with Moe that both of the above are unlikely to happen in the near future, but I don’t believe that those are the necessary conditions.

In its ruling, the SEC specified that the main reason for the rejection was:

“because the Commission believes that the significant markets for bitcoin are unregulated.”

While this may be true today, it’s unlikely to remain the case for long. As we have seen, several other major markets have made moves to regulate their cryptocurrency exchanges, and we will most likely see this trend pick up steam.

Even if the SEC were to insist on most exchanges being US-based (which I think even they would agree is an unreasonable condition), it’s not totally out of the question. Almost 40% bitcoin trading now happens in US$, making it the largest market, according to Cryptocompare.

via Cryptocompare - Bitcoin ETF
via Cryptocompare

Although only two of the top five US$-BTC exchanges are based in the US (Poloniex and Coinbase), one of them (Coinbase) already has a New York BitLicense. Poloniex, on the other hand, pulled out of New York rather than have to apply for a BitLicense. But that might change, either because Poloniex shifts priorities or because the requirements become less costly and cumbersome.

In the bitcoin sector, regulation is a trend that can only move forward.

With increasing exchange oversight and greater liquidity in the major trading markets, bitcoin prices will become more reliable and transparent, solving another of the SEC’s concerns.

So, I’m more optimistic than Moe that we will see a listed bitcoin ETF in the near future.

I don’t, however, think it will happen in the US first. Another country is far ahead in terms of regulation and acceptance by the financial system, and its regulators are more likely to approve a liquid, listed bitcoin investment vehicle in the short term.

Where?

Japan.

 

Bitcoin funds – alternatives to ETFs

by Steve Buissinne via StockSnap - bitcoin funds
by Steve Buissinne via StockSnap

Now that the Winklevoss Bitcoin ETF is off the table, it’s worth looking at the alternatives, present and future. What can you invest in if you want exposure to bitcoin without holding bitcoin?

In chronological order of listing, we start with a couple of Scandinavian funds.

The first publicly traded vehicle was an Exchange Traded Note (ETN), not an Exchange Traded Fund (ETF). An ETN is a debt note designed to provide investors with a return linked to a certain benchmark. On maturity, the investor will get the initial cash back, plus or minus the change in value of the underlying asset. An ETN can be liquidated before maturity by trading it on an exchange, or by handing in the relevant amount of the underlying asset to the issuing bank.

ETNs and ETFs are similar in that both track an underlying asset, both have lower expenses than actively managed mutual funds, and both trade on major exchanges. The main difference between them is that with an ETF, you’re investing in a fund that holds the underlying asset. With an ETN, you’re not – the return is tracked and calculated. Since an ETF is not backed by an asset, its credit worthiness is tied to the reliability of the underwriting institution.

In May 2015, Stockholm-based XBT Provider launched the first bitcoin-based ETN, on the Stockholm Stock Exchange (part of Nasdaq Nordic). It was called Bitcoin Tracker One and was denominated in kronor. Bitcoin Tracker EUR, denominated in euros, followed a few months later.

Trading of the two was briefly suspended a year later when XBT Provider’s parent company – KnC Group (which also owned bitcoin miner KnC Miner) – declared bankruptcy ahead of the bitcoin halving. XBT Provider was swiftly bought by Global Advisors (Jersey) Limited, a Jersey-based investment manager (of which more down below).

Both notes are now available in 179 countries (if investors have an account on Nasdaq Nordic), and both prospectuses have been approved by the Swedish financial supervisory authority.

In December 2016, Global Advisors (Jersey) Limited listed the Global Advisors Bitcoin Investment Fund on the Jersey Stock Exchange. While the vehicle had been created in 2014 and had received regulatory approval from the Jersey Financial Services Commission, this listing made it the first regulated bitcoin fund to trade on a recognized, regulated exchange. Rather than just hold bitcoin, it actively manages holdings in order to outperform the underlying asset.

The custodians for the fund are Gemini and itBit, both regulated bitcoin exchanges. Although the fund is pitched as a pure bitcoin play, its charter allows it to hold up to 25% of its wealth in non-bitcon assets.

The Bitcoin Investment Trust (BIT) was the first US-based private investment vehicle to invest exclusively in bitcoin. While technically it is a fund that can be traded and is available to certain segments of the public, holders can only sell one year after purchase.

BIT began raising capital on SecondMarket, an alternative exchange for private stock owned by Digital Currency Group CEO Barry Silbert, in September 2014. SecondMarket made a $2m seed investment in the fund. BIT is aimed exclusively at institutional and accredited individual investors, with a minimum investment of $25,000.

In 2015 it launched a new sponsor, Grayscale Investments. It also moved its trading to the OTCQX, the leading over-the-counter exchange in the US, where it resides today. The fund usually trades at a significant premium to the underlying asset, largely due to the low liquidity.

Other bitcoin ETFs are awaiting their turn in the spotlight. Next up is SolidX, which submitted its proposal in 2016. A ruling is due by the end of this month. And earlier this year, Grayscale Investments filed a proposal with the SEC to list BIT as an ETF in a $500 million initial public offering.

Furthermore, the Winklevoss brothers have said that they will continue to work with the SEC to address its concerns. While the barriers are high, it sounds like they haven’t given up.

The SEC and the Bitcoin ETF – what now?

Well, that was exciting…

source: CoinDesk
source: CoinDesk

The SEC decided to not approve the proposed Winklevoss Bitcoin ETF, citing the lack of regulation on bitcoin exchanges, and the possibility of using protocol forks to manipulate the price.

While disappointing, none of that is surprising.

What is surprising is that the price didn’t plummet further. That it found strong resistance at $1,000 and then started trending back up is testament to the underlying strength of sentiment.

CoinDesk provided an excellent post-game wrap-up, with comments from Tyler Winklevoss (striking an upbeat tone, way to go Tyler) and others, reflecting on the motives and consequences.

Since the rejection was based on the fundamentals of the bitcoin market, rather than on specifics to the proposed vehicle, it looks unlikely that an SEC-regulated ETF will be forthcoming any time soon. It is possible that other jurisdictions will take a more relaxed approach – but following SEC guidance, it’s unlikely.

So where now for the Winklevoss brothers? One option is to change the scope and objectives of the fund, and limit the availability to a certain type of participant, much like the Bitcoin Investment Trust which is only available to “professional” investors.

Or, the twins could choose to continue to “work with the SEC” (as Tyler said in his statement) to get the fund approved in its current form.

This will require unpacking what the SEC is likely to mean the next time around by “unregulated”.

Bitcoin itself cannot be regulated. It was born as an unregulated currency. To regulate it is to control it.

The exchanges, however, can be regulated. In fact, Gemini is. Gemini is the Winklevoss exchange, from which the ETF price would have been determined, and is one of only three companies to have been awarded a New York BitLicense, which authorizes it to carry out bitcoin exchange activities in the state.

And yesterday, an official from the Central Bank of China was reported as saying that the PBoC is looking (again, but apparently more seriously this time) at regulating the Chinese exchanges.

So, hopefully the Winklevoss brothers will try again (although I shudder to think what all this must be costing them in lawyers). It’s unlikely that deliberations will take quite so long next time around, but even so, a couple of years is a long time in bitcoin – it’s only been around for eight.

A couple of years is also a long time in politics, and the current US administration does seem eager to dismantle financial regulations swiftly. It also appears to be bitcoin-friendly, and can no doubt count on serious lobbying by people both within government and without to harness the potential without stifling it.

Let Round 2 begin.

Intriguing public comments on the Bitcoin ETF proposal

by Gemma Evans via StockSnap
by Gemma Evans via StockSnap

While you have most likely heard about the upcoming decision by the SEC on whether or not to approve the proposed Winklevoss Bitcoin ETF (given that most mainstream press is attributing the recent bitcoin price increase to positive expectations), what you maybe didn’t know is this:

Comments sent to the SEC advising on this decision are public. Anyone can tell the SEC what they think. And you can see what they wrote.

It’s fascinating, especially since some sector influencers have sent in their opinions.

For instance, Joshua Lim and Dan Matuszewski of Circle Internet Financial write:

“Both institutional and individual investors stand to benefit from the potential listing of the Winklevoss Bitcoin Shares. Such a listing would create a trusted, safe, transparent and regulated entry point into this maturing asset class, which is growing in importance as an investible store of value globally.”

Chris Burniske of ARK Invest (manager of the first ETF to invest in bitcoin) disagrees:

“After thorough examination, we think it would be premature to launch a bitcoin ETF because we do not believe the bitcoin markets are liquid enough to support an open-end fund, or that an ecosystem of institutional grade infrastructure players is yet available to support such a product.”

Attorney and professor of law Philip Chronakis is in favour:

“Denial of the proposed rule will not stop Bitcoin’s progress, but approval of the proposed rule, and the underlying COIN ETF, will put the SEC in the ideal position to oversee Bitcoin’s development as an investment asset – and provide fair, broad-based investment opportunities for not only the connected (or technologically savvy) few, but to all Americans who deserve the same chance to benefit from this technological breakthrough and financial opportunity.”

Michael Lee is against, and sheds some interesting light on recent price movements:

“The price of bitcoin is being heavily manipulated at this very moment on exchanges which somehow began the day of the SEC’s Feb 14th meeting but before the news of this very meeting was released to the public. Currently, we are at all time highs based on rumors and speculation on this meeting alone and it feels like we are again in a price bubble which could result in a huge loss for new investors. An approval of the COIN ETF at this time would only exacerbate this bubble and result in a price crash even before ETF trading will be fully available.”

Ben Elron uses stirring language:

“The Bitcoin ETF represents a rare opportunity for our country to embrace a revolutionary financial technology (the blockchain) with relatively low risk. Indeed, if approved, this fund would arguably be the most transparent, efficient and secure instrument ever offered – requisites enumerated in the Commission’s founding charters.

Blockchain is the future. If American regulators fail to embrace it, others will, and we will then be forced to follow. Let us lead once again.”

And in a somewhat quirky and impassioned comment, Diego Tomaselli implores:

“We understand your role is to protect the American Investor.

Please, just don’t forget to protect also the American Spirit.”

The magnitude of the price bump that approval would generate is uncertain. Given that the bitcoin price has increased by more than 18% since the beginning of the year, a case could be made that approval is already largely priced in.

Today CoinDesk revealed that GABI (currently one of the largest institutional investors in bitcoin) believes that the market is over-optimistic and is therefore reducing its holdings. Since early yesterday morning, the price has been falling, and at time of writing is down almost 8%.

Whatever happens over the next few days, it’s safe to assume that the bitcoin price will be volatile. Which may not be what you want in the underlying asset of an ETF.

That said, I’m hoping that it gets approved. 🙂

The Bitcoin ETF – is Bats the right exchange?

trading 700 - Bitcoin ETF exchange

The Bats exchange has been in the news this week – and not just because it is the preferred venue for the listing of the Winklevoss Bitcoin ETF, also much in the news recently.

Why the extra attention? Because CBOE Holdings Inc., has completed the acquisition of the operator of the Bats exchanges.

The merger represents a major shift in the exchange landscape in the US. CBOE Holdings Inc. is the owner of the Chicago Board Options Exchange, the largest options exchange in the US. Bats is the second largest stock exchange operator in the US, and the largest in Europe.

Could this affect the probability of the SEC approving the Winklevoss’ fund?

Let’s look at why they chose Bats for the listing. They were originally going to go with Nasdaq, but in mid-2016, they filed an amendment changing the exchange to Bats. Press comment at the time stressed the advanced technology of the trading platform, hinting that the Winklevoss brothers were choosing the more forward-thinking option.

No doubt the technology is part of it, but it’s likely that a larger role was played by Bats’ experience with ETFs: it is the largest ETF exchange in the US.

Nasdaq is no slouch in the technology department. Of all the US exchanges, it has invested the most in blockchain exploration. Its Linq platform enables private company shares to trade on the blockchain, and it recently released the results of a blockchain-based voting trial it conducted with Chain in Estonia last year.

But Nasdaq has fallen behind Bats in market share, and does not have its clout in ETFs.

Also, Bats technology is by many accounts the best in the business (all of CBOE Holding’s operations will migrate to Bats’ platform, a strong vote of confidence). However, at its first attempt at an IPO in 2012, the technology failed and the IPO had to be withdrawn at the last minute. The systems have been considerably strengthened since then, but the SEC could see the dependence on technology as a vulnerability.

That is unlikely, though, since the trend for exchanges is to move to electronic trading. Bats was founded in Kansas in 2005 out of frustration at the duopoly of trading markets, shared between Nasdaq and the NYSE. Unlike other, older exchanges that have incorporated technology bit by bit into their operations, Bats was technology-first.

The merger with the CBOE could be interpreted as enhancing Bats’ stability and reputation. The new entity is expected to have a market capitalization of approximately $10bn, close to that of Nasdaq. While Bats is a relative newcomer, the CBOE is over 40 years old. While Bats is known for its technology, the CBOE still operates physical trading pits. And CBOE Holdings is poised to join the S&P 500.

Furthermore, the CBOE is strong in options, and already talk is circulating of the new enterprise developing an exchange for options on ETFs. This could enhance the revenue prospects in a sector suffering from declining volatility, tougher competition and lower fees.

Even if the SEC denies approval for the Winklevoss ETF fund, it is only a matter of time before a proposal is presented that it will approve. When that day happens, the exchange of choice will probably be Bats.

The merger with CBOE is likely to work in favour of the ruling: if the SEC harboured any doubts about Bats’ durability and reliability, the additional clout and growth potential should put those to rest. Furthermore, the expertise in ETFs should facilitate sensible governance and compliance. And the combined entity’s reach across financial products and geographical jurisdictions underscore the potential that innovation in ETFs could bring to a diversifying segment of the economy.

That does not mean that approval is probable – there are a host of other complications to consider. It does mean that the choice of exchange unlikely to be a negative factor.