On 22 November 2024, the United States Securities and Exchange Commission received proposals i.e. proposal 1, proposal 2 and proposal 3 from Miami International Securities Exchange LLC and its affiliate, MIAX PEARL LLC, to amend their rules to permit the listing and trading of options on a range of Bitcoin-backed funds. The funds include well-known cryptocurrency financial instruments such as the Grayscale Bitcoin Trust, the Fidelity Wise Origin Bitcoin Fund, and the ARK 21Shares Bitcoin Exchange-Traded Fund (ETF). These filings to aim at integrating Bitcoin-related financial products into the regulated securities market of the United States.
The proposals are presented by Miami International Securities Exchange LLC (MIAX) and its affiliate MIAX PEARL LLC, which are recognised self-regulatory organisations under the oversight of the US SEC. As part of their obligations, the exchanges must comply with the United States Securities Exchange Act of 1934 and submit rule changes for US SEC review and approval. The US SEC is overseeing the review and potential approval of these changes if they align with the US SEC’s standard and has a satisfactory rationale to ensure transparent, fair, and investor-protective trading environments.
The proposals provide for amendments to Rule 402 (Criteria for Underlying Securities), which define the eligibility of Bitcoin-backed funds for options trading, Rule 307 (Position Limits), which set conservative caps on the maximum number of options contracts traders can hold, and Rule 309 (Exercise Limits), which regulate the maximum number of contracts exercisable at any time.
The filings propose the introduction of options trading for several Bitcoin-backed ETFs and trusts, including, Grayscale Bitcoin Trust (GBTC) which is a well-established trust representing fractional Bitcoin ownership, Fidelity Wise Origin Bitcoin Fund, which provides for newer ETF designed to reflect Bitcoin price movements, and ARK 21Shares Bitcoin ETF, which is a collaboration between ARK Invest and 21Shares, all offering exposure to Bitcoin prices.
The Miami International Securities Exchange LLC and its affiliate, MIAX PEARL LLC in their proposals, present rationale and reasoning for the rule changes, supported by data and industry trends, including investor Demand for Regulated Bitcoin Exposure, as Bitcoin has become an increasingly popular asset among retail and institutional investors. However, direct investment in Bitcoin poses challenges, including custody, security, and regulatory concerns. These Bitcoin-backed funds provide a regulated alternative for investors to gain exposure to Bitcoin price movements without directly owning the cryptocurrency. Secondly, the exchanges in their proposals argue that these funds meet the listing standards for options on exchange-traded funds (ETFs) in terms of liquidity, as all funds have trading volumes far exceeding the minimum requirements. For example, the Fidelity Wise Origin Bitcoin Fund records an average daily volume of 8.9 million shares. The exchanges fulfill the requirement for market capitalization as the Grayscale Bitcoin Trust have market values over US $13 billion, while each fund has more than 2,000 beneficial holders, ensuring they are widely held and actively traded.
The Miami International Securities Exchange LLC and its affiliate, MIAX PEARL LLC state that listing options on these funds will improve liquidity, support Hedging and Speculation and Enhance Price Discovery. To address potential concerns about market manipulation or excessive speculation, the proposals set conservative position and exercise limits of 25,000 contracts for each fund. These limits are lower than those for traditional ETFs with comparable trading metrics, which reflects a cautious approach to incorporating Bitcoin options.
The SEC’s recent approvals for Bitcoin-based ETFs, such as the iShares Bitcoin Trust, suggest a willingness to integrate cryptocurrency into mainstream markets under regulated conditions. However, the commission is likely to scrutinise these proposals closely, particularly given Bitcoin’s historical volatility and the nascent nature of cryptocurrency regulation.
If approved, these proposals could mean cryptocurrency integration into traditional financial markets. Investors would gain access to regulated options contracts linked to Bitcoin, expanding their toolkit for managing exposure to digital assets.
(Source: https://www.sec.gov/files/rules/sro/miax/2024/34-101717.pdf, https://www.sec.gov/files/rules/sro/pearl/2024/34-101719.pdf, https://www.sec.gov/files/rules/sro/pearl/2024/34-101718.pdf)
