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Why the Winelvoss Bitcoin ETF Was Rejected and How to Create a Regulated Vehicle That Passes Muster

 The Winkelvoss ETF application was rejected by the SEC, and bitcoin dropped about 20% in price. I repetitively warned those that followed me that a very low risk buying opportunity will present itself should the SEC deny the ETF application. Like clockwork, instant 30% profit opp. If you were monitoring hte prices and bought in after prices started rising (almost immediately) the buy returned over $250/coin (~30%) for anyone who took my advice.

ETF SEC buy the dip 

I’m considering putting together an institutional digital asset (bitcoin and blockchain related assets) investment vehicle. The SEC has clearly delineated what they felt were the deficinecies wee in the Winkelvoss application, to wit:

  • Several commenters note that the majority of bitcoin trading occurs on exchanges outside the United States. One commenter claims that most daily trading volume is conducted on poorly capitalized, unregulated exchanges located outside the United States and that these non-U.S. exchanges and their practices significantly influence the price discovery process. Another commenter states that the biggest and most-influential bitcoin exchange is located outside U.S. jurisdiction.

To my knowledge, the bitcoin exchanges abroad aren’t heavily capitalized, but the amount of capitalization needed should be minimal if the exchange is structured properly. Here”s a snapshot of the global bitcoin exchange landscape. Most of the exchange trading is done in USD but the exchanges are domiciled outside of the US (likley due to onerous SEC regulatory requirements). Be aware that I believe most of the institutional trading (in aggregate) is done OTC, and in the US.

IMG 20170312 204739

  • One commenter states that, since 2013, the price of bitcoin has been defined mostly by the major Chinese exchanges, whose volumes dwarf those of exchanges outside China. According to the commenter, those exchanges are not regulated or audited, and are suspected of engaging in unethical practices like front-running, wash trades, and trading with insufficient funds. The commenter interprets pricing data from these Chinese exchanges to mean that the price of bitcoin is defined entirely by speculation, without any ties to fundamentals.32 Another commenter also observes that Chinese markets drive much of the volume in the bitcoin markets and that the bitcoin/Chinese Yuan (BTC/CNY) quote is apt to trade at a significant premium to the bitcoin/U.S. dollar (BTC/USD) quote. The commenter points out that large arbitrage opportunities would not exist for long in efficient markets, but they do persist in bitcoin markets. One commenter claims that a sizeable number of traders and owners of bitcoin do not desire to trade in a well-regulated environment for reasons including tax evasion, evading capital controls, and money laundering. This commenter also states that U.S. exchanges do not offer products such as fee-free trading, margin trading, or options, which drive traffic to the top nonU.S. exchanges. The commenter claims that, because trade is now sparse on regulated U.S. exchanges including Gemini, arbitrage will not occur efficiently or proportionally to mitigate.manipulation from the dominant unregulated bitcoin exchanges. This commenter also claims that several Chinese exchanges actively engage in bitcoin mining operations, creating a conflict of interest, and notes that these exchanges are unaudited and unaccountable.34 Another commenter also claims that the Chinese exchanges that account for the bulk of trading are subject to little regulatory oversight and that existing know-your-customer or identity-verification measures are lax and can be easily bypassed

This is no longer the case. The PBOC (Chinese Central Bank) has cracked down signficantly on Chinese bitcoin exchanges, ending fee free trading, unregulated margin lending and enforcing AML/KYC procedures. Reference:

  1. Chinese Bitcoin Exchanges Suspend Client Withdrawals. I Warned You About Heteronomous Wallets!
  2. Will Japan’s Declaration of Bitcoin as Legal Tender Accelerate Cryptocurrency Mainstream Adoption?
  3. Revisiting the Breakdown of the Macro Drivers Behind Bitcoin’s Price Spike, Exactly As I Foretold 30 Day Ago
  4. China’s Central Bank Eliminates Margin Trading of Bitcoin
  5. The Macro Truth About The Big Bitcoin Pop and Drop: The Mainstream Media Doesn’t Have A Clue

The result is a signficant drop in bitcoin trading volume in China, passing the crown first to Japan (who just passed heavy bitcoin regulation, while declaring it legal tender) and then to the US – in direct contravention to said commenter’s claim. Take note that once the free trading was halted and central bank regulation took hold, trading volumes in China collapsed in line with the ROW.


bitcoin trading volume

  •  One commenter states that the market for bitcoin, by trade volume, is very shallow. This commenter notes that the majority of bitcoin is hoarded by a few owners or is out of circulation. The commenter also notes that ownership concentration is high, with 50 percent of bitcoin in the hands of fewer than 1,000 people, and that this high ownership concentration creates greater market liquidity risk, as large blocks of bitcoin are difficult to sell in a timely and market efficient manner. This commenter claims that daily trade volume is only a small fraction of total bitcoin mined. 36 This commenter also states that several fundamental flaws make bitcoin a dangerous asset class to force into an exchange traded structure, including shallow trade volume, extreme hoarding, low liquidity, hyper price volatility, a global web of unregulated bucket-shop exchanges, high bankruptcy risk, and oversized exposure to trading in countries where there is no regulatory oversight.37 This commenter believes that lack of regulation and consumer protection also increase the chance and incentives for market price manipulation and states that approving the ETP before structural protections and controls are firmly in place would put investors at undue risk.

 This was actually countered by the authors of the ETF application, to wit:

The Exchange, in its comment letter, asserts that bitcoin is resistant to manipulation, arguing that the increasing strength and resilience of the global bitcoin marketplace serve to reduce the likelihood of price manipulation and that arbitrage opportunities across globally diverse marketplaces allow market participants to ensure approximately equivalent pricing worldwide.39 The Exchange further asserts, in its comment letter, that the Commodity Futures Trading Commission (“CFTC”) has designated bitcoin as a commodity and is “broadly responsible for the integrity” of U.S. bitcoin spot markets.40 The Exchange acknowledges that the CFTC has not yet brought any enforcement actions based on the anti-manipulation provisions of the Commodity Exchange Act, but notes that the CFTC has issued orders against U.S. and non-U.S. bitcoin exchanges for engaging in other activity prohibited by the Commodity Exchange Act. The Exchange’s comment letter states that a regulatory framework for providing oversight and deterring market manipulation therefore currently exists in the U.S.41

Another response went as follows:

…Bitcoin is relatively uncorrelated with other assets, enabling investors to construct more efficient portfolios,43 and that, as a general matter, the underlying market for bitcoin is inherently resistant to manipulation.44 The author of the paper posits that the underlying bitcoin market is not susceptible to manipulation because (a) there is no inside information related to earnings, revenue, corporate actions, or new sources of supply; (b) the asset is not subject to the dissemination of false or misleading information; (c) each bitcoin market is an independent entity, so that a demand for liquidity does not necessarily propagate across other exchanges; (d) a substantial over-the-counter (“OTC”) market provides additional liquidity and absorption of shocks; (e) there is no market-close pricing event to manipulate; (f) the market is not subject to “spoofing” or other high-frequency-trading tactics; (g) order books on exchanges worldwide are publicly visible and available through APIs (application program interfaces); and (h) it is unlikely that any one person could obtain a dominant market share.45 The author also asserts that listing the shares on a national securities exchange and a shift from OTC trading to trading on exchanges would make the overall bitcoin market more transparent.

 There were also public comments deriding the Gemini exchange, directly. While I don’t, personally, care for the Gemini exchange, some of the issues taken with it were impractical. For instance:

  • One commenter states that the Gemini Exchange Auction could be an improvement over other bitcoin pricing mechanisms, but asserts that the auction has not improved volume. The commenter claims that the Gemini Exchange has the lowest liquidity of the three exchanges in the United States and is one of the least-liquid of all exchanges that trade bitcoin for U.S. dollars.56 The commenter observes that the auction data show that traders in the auction are taking advantage of the discounted auction price. The commenter notes that the daily two-sided auction process was designed to maximize price discovery and reduce price volatility that could be the result of momentum pricing, but asks what measures have been put in place to address traders who take advantage of the discounted auction price. The commenter also notes that while other financial products sometimes have auctions to determine price, an auction on a stock exchange does not require money to be deposited in advance with the exchange to be in the auction. The commenter notes that, by contrast, the Gemini Exchange requires dollars or bitcoin to be deposited before participation. The commenter believes that this is a problem because the Gemini auction is limited and “warped” and has failed on at least two occasions.

Listen, no market is perfectly efficient, and early markets are likely to be particularly inefficient. That’s one of the main reasons to introduce an ETF, to inject liquidity and efficiency. Even the largest and most efficient market in the world has trade failures, as has been noted by Bloomberg:Failed Trades in 10-Year Treasury Soar as Note Stays `Special’:

The shortage of benchmark 10-year Treasury notes in the market for borrowing and lending U.S. government debt has become so pronounced that uncompleted trades are soaring. Such trades, known as fails, surged into the billions of dollars in recent days for the newest 10-year note, and may have been in the range of $6 billion to $12 billion, according to Treasury market participants familiar with the matter who requested anonymity because the figures aren’t public. While uncompleted trades occur daily, sometimes because of computer glitches, it’s unusual for the level to be so high. There were $132 million in failures for all 10-year Treasuries in the week ended Feb. 24, the latest data from the Federal Reserve Bank of New York show.

 I can go deeper into the SEC declination analysis for insitutional subscribers who may be interested in creating or partipating in an institutional vehicle to access bitcoin exposure. Email me via reggie @

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Feds: “We Come Across Real Estate Being Purchased With Illicit Funds Once Every Other Case”

The latest note out of real estate expert Mark Hanson points to something we have discussed since 2012: the use of US real estate to park “hot” and in some cases illegal foreign capital in US real estate courtesy of the NAR’s exemption from anti-money laundering regulations. Some of the highlighted observations are stunning.

Higher-End REAL ESTATE TROUBLE Worsens (From New York to Florida to California), by Mark Hanson of M Hanson Advisers

In Feb. 2016, the Treasury’s FinCEN enacted “GEOGRAPHIC, ANTI-MONEY-LAUNDERING, TARGETING ORDERS of 2016“.

Apparently, the program worked out so well, in August ’16, it was expanded to cover the rest NYC and SoFL, in addition to the LA, San Diego, San Fran Bay Area, and San Antonio regions. Regarding the expansion, on July 28, 2016, I put out a note entitled “7-28 Hanson…Higher End Real Estate’s Coup De Grace…Heads-Up,.” copied at the bottom of this note, highlighting what I perceived to be the fall-out.

Everybody assumed this program would end organically last month, but it was renewed for another year, which wasn’t widely reported.

THESE STATEMENTS BY INVESTIGATORS ARE OMINOUS, especially considering that “foreign and domestic fraud and money laundering” was one of my “four pillars of unorthodox housing demand”, over which I have pounded the table for the past several years.

We don’t come across [money laundering in real estate] once every 10 or 12 cases,” John Tobon, U.S. Homeland Security Investigations Deputy Special Agent in Charge for South Florida, told the Miami Herald in January. “We come across real estate being purchased with illicit funds once every other case.” 


“FinCEN said that 30 percent of reported transactions across the nation were linked to buyers who had been flagged by banks and other financial institutions for suspicious activity.”

Well, this is one way to narrow the ever-increasing divergence between higher and lower end real estate prices…blow-up the higher end.

I don’t find it any coincidence that the era of ASPIRATIONAL PRICES in the middle-high to luxury segment ended abruptly in early 2016, in lock-step with this program ramping up, as evidenced by headlines of 20% to 40% list price haircuts reported constantly – most recent is Mickey Drexler’s $35M to $19.95M haircut — in exactly the markets, which the program targets.

There is such a thin pool of demand for middle-high to luxury real estate, that if one demand cohort goes away (fraud, or suspicious purchases by LLC’s, for example), and some “innocent others”, who simply don’t want the Treasury tracking them, “move to the sidelines”, it will create a massive hole in demand and pricing power.

It only takes a few real estate transactions to “reset” entire markets, higher and lower, and establish new trends before most everybody else (headline readers) without access to real-time, transactional data even realizes it.

Region’s being tracked now are listed, as follows. The price triggers aren’t too high. Heck, $2mm may not even get you a quarter-acre dirt in Palo Alto.

  • New York: Manhattan with a threshold at $3 million; Brooklyn, Queens, Bronx, and Staten Island at $1.5 million.
  • Florida: Miami-Dade County, Broward County, and Palm Beach County, all at $1 million.
  • California South: San Diego County and Los Angeles County;
  • California North: San Francisco, San Mateo County, and Santa Clara County, all at $2 million.
  • Texas: Bexar County (San Antonio area) with a threshold of $500,000.

Small leaks in large bubbles can turn into rips very easily. Which makes it critical for high end owners, investors, and speculators, that the remaining “three pillars of unorthodox demand”, which I am tracking closely, don’t fail (some already are).

The article below by Miami Herald covers the renewed GTO for 2017:

Feds renew crackdown on dirty money in Miami real estate
By Nicholas Nehamas

Feb 23, 2017

After months of “will-they-or-won’t-they” speculation, the U.S. Treasury Department announced Thursday that it will extend its search for dirty money in six high-end real estate markets, including South Florida, for another six months.

The rules, initially imposed early last year as a temporary measure on Miami-Dade County and Manhattan, require shell companies buying expensive homes with cash to report their true owners to the Financial Crimes Enforcement Network (FinCEN), a Treasury agency. Law enforcement officials have said a lack of oversight allows criminals from around the world to launder money through luxury real estate in the United States.

In the weeks following the election of President Donald Trump — a former real estate developer — it was unclear whether the new administration would continue the effort, which was set to expire on Thursday.

“This is an administration that says it is both pro-business and pro-law enforcement,” said Lee Stapleton, a South Florida attorney and former federal prosecutor. “This order shows that they’re not incompatible. … It’s not good for real estate or for business if illicit dollars are artificially inflating the market. And law enforcement doesn’t want real estate to be a safe haven for money laundering.”

The so-called geographic targeting order had already been renewed once before when it was also expanded to Broward and Palm Beach counties; the other four boroughs of New York City; Los Angeles County; San Diego County; the greater San Francisco area; and the county that includes San Antonio, Texas. The rules kick into effect at different price points depending on the market. In South Florida, home sales of $1 million or more are covered.

By extending the order rather than announcing a plan to craft permanent regulations that would apply nationwide, the Trump administration showed it has perhaps not made up its mind on whether to continue the crackdown long-term, said Andrew Ittleman, a Miami-based attorney who is an expert on anti-money laundering compliance laws.

“I wouldn’t read too much into the extension,” Ittleman said. “Trump was only inaugurated a month ago. To me, this is a sign the administration could be kicking the can down the road a little bit. … They have plenty of issues on their plate right now.”

The cities chosen for enhanced scrutiny all feature pricey real estate markets and an abundance of foreign buyers, a combination that federal law enforcement officials believe make them prime targets for money laundering.

“We don’t come across [money laundering in real estate] once every 10 or 12 cases,” John Tobon, U.S. Homeland Security Investigations Deputy Special Agent in Charge for South Florida, told the Miami Herald in January. “We come across real estate being purchased with illicit funds once every other case.”

The revelations of the Panama Papers showed how easily secret money from offshore flows into South Florida real estate.

Money laundering fight

In a news release, FinCEN said that 30 percent of reported transactions across the nation were linked to buyers who had been flagged by banks and other financial institutions for suspicious activity.

The agency has not said how many transactions have been reported or whether any have led to criminal investigations. Officials have described the rules as a temporary data-gathering activity meant to determine whether money laundering in real estate deserves permanent national regulations.

“These GTOs are producing valuable data that is assisting law enforcement and is serving to inform our future efforts to address money laundering in the real estate sector,” FinCEN acting director Jamal El-Hindi said in a statement. “The subject of money laundering and illicit financial flows involving the real estate sector is something that we have been taking on in steps to ensure that we continue to build an efficient and effective regulatory approach.”

Some brokers and developers have worried that the rules would affect sales — although a Herald analysis found that doesn’t appear to be the case — and criticized the government’s efforts as unnecessary and poorly designed. But a national trade group for the title industry said it supports the anti-money laundering push.

“Our members have collected this information for more than a year and the good news is those efforts appear to be beneficial to the government’s work identifying money laundering schemes and the illegal purchase of real estate,” Michelle Korsmo, chief executive officer of the American Land Title Association, said in a statement. “We continue to work closely with our members and FinCEN to collect the needed information as efficiently as possible.”


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Over 5,000 Flights Canceled Due To Winter Storm Stella As NYC NatGas Price Soar

US carriers have grounded 1,796 flights today, and 3,384 tomorrow – numbers which keep constantly rising – as Winter Storm Stella approaches the U.S. Northeast, according to

Chicago is bearing the largest share of Monday’s cancellations, while Tuesday’s disruptions are hitting hardest from Washington to Boston including the New York City area, AP adds. The major airlines are waiving ticket-change fees that range up to $200 for customers who want to change their travel plans. Restrictions vary by airline.

Southwest has canceled more than 300 flights for Monday and nearly another 900 scheduled for Tuesday, according to FlightAware. American Airlines and its American Eagle contractor Envoy Air together had canceled more than 300 flights Monday and 700 on Tuesday. JetBlue Airways, with major operations in Boston and New York, had already canceled more than 600 flights scheduled for Tuesday, FlightAware said.

The weather system may dump as much as 20 inches (51 centimeters) of snow from Connecticut to Long Island, including New York City, according to the National Weather Service. A deep freeze is poised to linger in the Northeast after the storm passes, sending Boston’s low to 14 degrees Fahrenheit (minus 10 Celsius) on March 16, 17 below average, AccuWeather Inc. data show

Meanwhile, as the blizzard bears down on the Eastern Seaboard, natural gas futures rose to one-month highs on speculation that demand for the heating fuel will surge during the storm, shrinking a supply glut, Bloomberg reports.

The late-winter cold blast is giving gas bulls a break after a warm start to the season sent the market plunging to an eight-month low earlier in the year. While gas stockpiles are still above normal for this time of year, frigid conditions could erode the surplus and stave off another price collapse before the summer.


“It’s not just tomorrow’s storm, but the forecast going out to late March that should be supportive for prices,” said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. “But we’re coming to the end of the season, and storage is pretty healthy.”

While gas futures for April delivery rose 1.2%, to $3.044 per mmBTU at after earlier reaching $3.089, the highest since Feb. 10, gas is still down 18 percent this year, the worst performer among major commodities. However, a look at spot prices for NYC nat gas shows a much bigger spike, which is to be expected as the region will be most affected by the coming weather.

Of course, once the weather system passes later this week, expect a similar and just as sharp drop in prices.

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Holland’s Anti-EU ‘Freedom Party’ Boosted As Turkish Tensions Mount

With less than 48 hours until polling begins in the first major European election of the year, Bloomberg reports that snap polls show support for the anti-Islam, euroskeptic Freedom Party of populist Geert Wilders being re-energized after the last few days chaotic events surrounding Turkey.

Just as we warned over the weekend, in the near-term, however, the outstanding question is how will Saturday’s events impact Wednesday’s Dutch general election, and whether the diplomatic clash will boost votes for Geert Wilders. As Reuters notes, “the diplomatic row comes in the run-up to the coming week’s Dutch election in which the mainstream parties are under strong pressure from the far-right party of Geert Wilders.”

And this morning, as Bloomberg notes, after politicians on all sides rounded on the Turkish government for dispatching ministers to the Netherlands for domestic political ends on the eve of the Dutch election, Erdogan said on Sunday that the Netherlands would “pay the price” after Rutte’s government denied entry to Turkey’s foreign minister and escorted a second Turkish minister to the Dutch border.

Prime Minister Mark Rutte told NRC on Monday morning, when asked if the chance to play the role of the “strong” prime minister would help him on Wednesday.

“I wasn’t waiting for this… This cost me hours and hours of campaign time. But it’s just my job, being prime minster comes first.”

But as Kees Aarts, professor of political institutions and behavior at the University of Groningen, explains,

While “the cabinet has shown political decisiveness…  when you add everything up, what happened will clearly help Wilders. He wasn’t very visible during the campaign and not very involved. But in the end it’s his main theme that’s at stake now.”

A snap poll on the incident by found that 86 percent of more than 2,000 respondents said that Rutte had done a good job during the dispute. However, it also found that Freedom Party voters were fired up, with Wilders supporters saying for first time during the campaign they would “certainly” vote for his party, known by its Dutch acronym, PVV. That could lead to higher turnout among PVV supporters at the election on March 15, according to


So, as The Express asks (and answers), what will happen if Wilders wins?

Mr Wilders’ election would mark Europe’s first political earthquake of the year ahead of the important French and German elections later in 2017. The far-right politician pledges to ‘de-islamise’ the country by closing its borders, banning Islamic headscarves, closing mosques and banning the Koran. He has vowed to take the Netherlands out of the EU as well stopping public money going towards development aid, windmills, the arts, innovation and broadcasting.

But what will really happens if Mr Wilders triumphs in the election next month?

Although Mr Wilders is projected to get the most votes in the election, the PVV will not be able to form a Government on its own. Unlike Britain and the US, the Netherlands is always ruled by a coalition of political parties due to the fragmented nature of Dutch politics. Winning the most seats does not automatically make Mr Wilders Prime Minister because the top job goes to the leader with the most seats in the coalition.

But VVD Prime Minister Mark Rutte has already ruled out a coalition between VVD and the PVV if Mr Wilders wins the election.

“No, we wouldn’t do that,” Liberal Prime Minister Mark Rutte says at news conference in Rotterdam when asked if he’ll co-operate in government with Geert Wilders’s Freedom Party after Wednesday’s election.


Rutte on previous experience in govt with Wilders: “When the crisis was the deepest, he ran away”

Other Dutch parties are also unwilling to form a coalition with him, according to Rem Korteweg, senior research fellow at the Centre for European Reform (CER).

“The result of that is going to be a political mess after the election,” Mr Korteweg said, noting that there could be political stalemate.

If the PVV is excluded from the coalition, then it will be very large, unwieldy and at risk of falling apart and leading to fresh elections. Even if Mr Wilders is blocked from real political power in the Netherlands, his election would be devastating blow for Europe’s liberal order.

The far-right populist victory could boost the chances of Front National leader Marine Le Pen in the French elections this spring.

It would also be welcomed by Frauke Petry – the woman leading the populist Alternative for Germany (AfD) into the German federal elections in September.


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