US authorities reject nine Bitcoin ETF plans in one fell swoop

It looks like the US Securities Exchange Commission is not ready to bend on its stance that the cryptocurrency market needs reform before its ready to sign-off on Exchange Traded Funds for the sector. 

As we’ve been reporting, today (Thurs, August 23rd) was always going to be a big day for Bitcoin, with the long-expected decision from the US Securities Exchange Commission on the the Bitcoin Exchange Traded Fund proposal from ProShares likely to shake up market valuations in the cryptocurrency sector. However, while the SEC’s decision to reject the ProShares proposals relating to two seperate funds – citing many of the same issues as it had with an earlier proposal fronted by the Gemini Exchange‘s Winklevoss twins – was of little surprise, it was interesting that it also issued decision relating to two other companies.

Specifically, the SEC said no to a further seven proposed schemes – five from dedicated ETF specialist, Direxion, and another two by GraniteShares. Decisions on those two proposals weren’t due until September 15th and 21st respectively, but with all of those rejections out of the way now, it leaves only two further ETF rulings on the horizon: those relating to further plans from VanEck/SolidX. With decision on those due by 30th September, it’s unclear why the SEC did not decide to rule on that too – but could hint that there is further debate to be had on what some consider the most likely proposal to succeed.

The three very similar rulings issued last night again fell back on fears of the funds inability to account for or “prevent fraudulent and manipulative acts and practices” in the Bitcoin market, as much of the price of Bitcoin is dictated by unregulated exchanges – such as BitFinex and BitMEX – based away from American shores. While the ProShares proposal looked to source its market pricing from the established, Chicago-based, CBOE and CME futures exchanges , the SEC didn’t consider them to be of sufficient size to guarantee a robust marker for the ETFs.

One particular passage appears in all three rulings, though in slightly different formulations. This, is directly from the GraniteShares ruling, and sums it up:

“While the Exchange would, pursuant to its listing rules, be able to obtain certain information regarding trading in the Shares and in the underlying bitcoin or any bitcoin derivative through registered market makers, this trade information would be limited to the activities of market participants who trade on the Exchange.”

“Furthermore, neither the Exchange’s ability to surveil trading in the Shares nor its ability to share surveillance information with other securities exchanges trading the Shares would give the Exchange insight into the activity and identity of market participants who trade in bitcoin futures contracts or other bitcoin derivatives or who trade in the underlying bitcoin spot markets, where a substantial majority of trading, the Commission concluded in the Winklevoss Order, “occurs on unregulated venues overseas that are relatively new and that, generally, appear to trade only digital assets.”

It goes on to say that Exchange’s must demonstrate they have in place “a surveillance-sharing agreement with a regulated market of significant size related to bitcoin, because “[s]uch agreements provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.”

 

Recent sharp changes in the price of Bitcoin have highlighted problems in a market that is concentrated around a few exchanges that can exert great influence, while largely operating outside of the kind of regulation and oversight that the SEC is looking for. Whether or not the proposal of VanEck/SolidX – or the efforts of US exchanges to band together and stave off regulation – can get past these issues, remains to be seen.

In the words of crypto-savvy lawyer, Jake Chervinsky…

On a more encouraging note, though, the commission once again opened its rulings by noting 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,” as much as it sees these proposals as not passing muster yet.