A Deeper Look Inside the SEC’s Bitcoin ETF Rejections

While the broader cryptocurrency community awaited the U.S. Securities and Exchange Commission’s (SEC) decision on Bitcoin Exchange Traded Funds (ETFs), the watchdog rejected all nine applications made by three different players in one sweeping move on Aug. 22.

SEC’s Clean Sweep

Related: Another Day, Another ETF Denial: SEC Rejects 9 Bitcoin ETF Proposals

While two separate disapprovals came earlier than expected–they were due in September–the ProShares decision was due Aug. 23 and issued a day earlier. In fact, the latter presented the strongest chance for an approval among all applications, courtesy of its connection with The New York Stock Exchange’s ETF arm, Arca.

Alongside the aforementioned proposals, seven other ETF proposals have been rejected by the U.S. regulator including five from Direxion, another NYSE Arca-backed hopeful, and two from CBOE-backed GraniteShares.

The SEC revealed its stance on the disapproval, stating the cryptocurrency market is insufficiently equipped to prevent financial manipulation, fraudulent schemes and has an absence of stringent investor protection rules.

The SEC noted:

“[T]he Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5).”

The authority also highlighted an integral flaw within the cryptocurrency market, which provides no resistance to blatant price manipulations; presumably referring to “whales,” or large holders of cryptocurrencies that have the ability to move the market with huge orders.

Bitcoin’s Derivative Insignificance

All three disapprovals posses a unifying theme in regard to the SEC’s disallowance: Bitcoin markets aren’t massive enough to require a sophisticated, government-backed financial instrument at this stage.

The three disapprovals added:

“That failure is critical because, as explained below, the Exchange has failed to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, and therefore surveillance-sharing with a regulated market of significant size related to bitcoin is necessary.”

Referring to a March 2018 judgment on ProShare’s ETF proposal, the SEC pointed out that the company “does not intend to hold Bitcoin Futures Contracts through expiration.” Instead, ProShares aims to “close or roll their respective positions,” opinioned the SEC at the time.

For the ETFs, the aforementioned reasons form a significant risk to becoming a regulatory-approved instrument; in addition to the prevalent concerns over extreme volatility and the market’s minute liquidity.

Positive on Bitcoin

Despite the disappointing orders, the SEC was quick to note its stance on Bitcoin and blockchain technology:

“The agency emphasizes that its disapproval does not rest on an evaluation of whether Bitcoin or blockchain technology more generally, has utility or value as an innovation or an investment.”

To sum up the SEC’s judgment, the facts show the lack of regulations as the authority’s primary concern, instead of Bitcoin or other cryptocurrencies themselves.

In March 2017, the watchdog provided similar reasons for the rejected Bitcoin ETF application from the Winklevoss twins, owners of Gemini, stating a significant derivative market for Bitcoins must exist before a “surveillance-sharing agreement” can take place.

In July 2018, the Winklevoss twins tried their luck at an ETF approval again, along with providing evidence of the cryptocurrency market’s “resistance to manipulation.” However, the SEC was quick to reject the idea while stating “the agency does not support such a conclusion.”

More recently, in August, a Bitcoin-ETF filed by investment firm VanEck and financial services provider SolidX (trading on CBOE) was rejected by the SEC. The ETF was perhaps more innovative than those of ProShares or Gemini as it offered physically-delivered Bitcoins instead of a derivative.

The SEC cited its usual reasons for the disapproval, but this time, adding the lack of storage for “physical” Bitcoins as a major concern.

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