By Tanaya Macheel
A Toronto-based investment fund manager is working to overturn the rejection of a proposed Bitcoin Fund (QBTC) by the Ontario Securities Commission (OSC) on the argument that regulators are withholding opportunities from Canadian investors and holding back advancements in fintech.
If successful, the company, known as 3iQ, will syndicate the bitcoin fund to be listed on the Toronto Stock Exchange. (Meanwhile in the U.S., the Securities and Exchange Commission has continued to delay its decisions on the VanEck and Bitwise Bitcoin ETF applications.) The first three of four scheduled public hearings were held last week; the final one is set for July 12.
“We really hope we’re going to have the first major exchange-listed bitcoin fund in the world that’ll be available to the average investor,” Fred Pye, 3iQ’s CEO, told Cheddar in an interview.
Last fall, 3iQ publicly filed a non-offering preliminary prospectus for the Bitcoin Fund; in February it was rejected. Like the proposed bitcoin ETFs in the U.S., the Canadian regulator determined that 3iQ’s bitcoin fund is “not in the public interest,” according to Raymond Chan, acting director of the OSC’s investment funds and structured products branch. Chan cited concerns around bitcoin’s nascent stage of development, market manipulation and integrity concerns, among other reasons.
But unlike in the U.S. -- where the burden of proof is on the party submitting the ETF proposal -- in Canada the onus is on the regulators to explain why their rejection is fair.
“Regulators have to prove that it's not in the public interest to have a regulated bitcoin fund," Pye said. "And in the face of a QuadrigaCX (the defunct exchange whose founder died, leaving customers without access to their funds), it's really tough for them to convince people it's not in the interest to have a safe and regulated fund."
According to the OSC’s own regulatory process, 3iQ needed a formal rejection of the prospectus from the director in order to later appeal at a public hearing in front of a panel of OSC Commissioners.
Grant Thornton is the appointed auditor of the fund – which invests 50 percent bitcoin, 35 percent ether and 15 percent litecoin; Cidel Trust Company is the custodian and Gemini Trust Company the sub-custodian, according to 3iQ’s March application for a public hearing. The fund’s initial counterparties include Gemini, Genesis Global Trading, Xapo and Circle – all regulated virtual currency businesses under the New York State Department of Financial Services.
Other than “the public interest,” the OSC had questions about audit, custody, market manipulation, liquidity – “the kinds of things we hear with the SEC often,” Pye said. The SEC has turned down about 10 ETF proposals to date and has twice delayed the decision on the proposal by VanEck (a 9.9 percent owner of 3iQ), SolidX, and Bitwise.
To be clear, 3iQ’s Bitcoin Fund is a closed-ended fund, which differs from an ETF in terms of fees, fund transparency and pricing on the open market: it is not in continuous distribution like a mutual fund or ETF, it has more limited redemption rights, investors can’t redeem their money on demand at the net asset value but can do so annually, or monthly at a discount. If approved, 3iQ’s Bitcoin Fund would engage underwriters to complete an offering and list its securities on an exchange to provide its investors with secondary market liquidity.
“The testimony they put up relies heavily on SEC submissions and looking at the wrong product,” Pye said. “They were trying to put up arguments that don’t make sense in a closed-end fund.”
There’s also no proof of market manipulation, Pye said, citing the two-part report from Bitwise Asset Management that concluded bitcoin markets are more efficient and mature than they’re widely believed to be. The report was submitted as part of the comment period between delays on the SEC decision about its own ETF proposal.
3iQ has been working on a filing confidentially with the OSC since 2016, but it was last summer the regulators determined they were not yet ready to approve the fund, Pye said, and the company then decided to file publicly.
“Our only defense and our own challenge is that … when we get a public rejection we have the right to go to a public hearing. It’s then that the burden of proof is on the regulator to explain why they rejected the filing and up to us to prove that the proposal conforms to the law.”