As the recent news has it, the SEC rejected the last application for a Bitcoin exchange-traded fund it had to review. There are no more applications pending, and it seems the Commission isn’t going to make Bitcoin ETFs happen, at least soon.
In this article, forklog.media rounds up the SEC’s response to applications, as well as the difference Bitcoin ETFs would make for the crypto-industry.
What is ETF?
Talking about ETF, it’s better to have a reminder about the actual concept.
ETF, or exchange-traded fund, is a type of security traded on stock exchanges. An ETF is an investment fund that holds certain assets like stocks or currencies and is designed in such a way that its price follows the prices of an underlying asset or assets.
Typical ETFs are index funds, meaning that they mirror the movements of a certain market index encompassing a portfolio of assets, such as the Dow Jones Industrial Average based on stocks of 30 large companies. An index fund following the DJI index would invest in the same 30 companies. Similarly, instead of stock, a fund may invest in commodities or currencies.
Financial institutions usually buy large batches of ETF shares directly from the operating entity to sell them on the open market, where they are then available for trading through broker-dealers, just like stocks.
An ETF allows investors to diversify their portfolios without buying or otherwise owning the assets tracked by the fund. A Bitcoin ETF would, therefore, track the performance of the first cryptocurrency and effectively allow investors to trade Bitcoin without ever buying it.
SEC Turning Down Bitcoin ETFs
Although there are exchange-traded funds, such as Invesco Elwood Global Blockchain ETF and AdvisorShares Sabretooth ETF, tracking blockchain-related companies, there isn’t any for Bitcoin or other cryptocurrencies.
People have tried to launch Bitcoin-based ETFs since 2014 when the Winklevosses began planning to launch their Bitcoin Trust ETF, which was meant to be tied to the BTC price obtained from their Gemini crypto-exchange. On June 30, 2016, the Bats BZX Exchange, a regulated U.S. stock exchange, asked the SEC for permission to list Bitcoin Trust shares. In March 2017, BZX’s application was rejected and the Commission released a statement explaining the decision.
“As discussed further below, the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest, ” the statement reads.
The document continues with two primary conditions for an ETF to be allowed:
“First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated.”
In response, BZX filed a petition for the Commission review. The petition was granted, the SEC considered the proposal once again, then rejected it once again and provided brief 92-page disapproval.
Again, BZX failed to meet the requirements set forth by Subsection 5 of Section 6(b) of the Exchange Act, which requires exchanges to have rules “designed to prevent fraudulent and manipulative acts and practices.”
The SEC pointed out that with its proposal BZX had to:
- prove their own assertion that “Bitcoin and bitcoin markets, including the Gemini Exchange, are uniquely resistant to manipulation;”
- demonstrate that its “traditional means” of identifying and deterring fraud and manipulation are sufficient to meet the requirements of Exchange Act Section 6(b)(5);
- enter into a comprehensive surveillance-sharing agreement with a regulated market of significant size related to Bitcoin;
In simpler terms, there had to be a regulated market for Bitcoin, with which the exchange had to have agreements on sharing information needed to detect potential fraud and price manipulation.
As it turned out, the proposal failed on all sides.
Notably, the SEC’s statement stresses that the disapproval has no judgment against Bitcoin or blockchain technology:
“The Commission 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.”
However, the SEC Commissioner Hester Peirce didn’t agree with the rejection of BZX’s proposal.
“The Commission erroneously reads the requirements of Section 6(b)(5). The disapproval order focuses on the characteristics of the spot market for Bitcoin, rather than on the ability of BZX—pursuant to its own rules—to surveil trading of and to deter manipulation in the ETP shares listed and traded on BZX,” she wrote.
The Commissioner also added that Section 6(b)(5) “says nothing about looking at underlying markets, as the Commission often has done in its orders.”
Nevertheless, shortly after BZX got its first rejection, the SEC turned down a proposal by NYSE Arca to list SolidX Bitcoin Trust ETF. The reasoning behind the decision was overwhelmingly similar.
In 2019, the SEC Chairman Jay Clayton told FOX Business that he is not against the asset itself, but there are concerns about manipulation and investor protection.
“What I’m concerned about at the moment is if it can be reasonably demonstrated that the underlying trading is generally not manipulated, it’s happening on reliable venues with good rules and that custody is something we can feel comfortable about.”
Despite the rejections, applications for Bitcoin ETFs kept on coming, but the SEC has been turning down all bids up until now, the end of February 2020, and there is no more to review.
The main reason behind all of the rejections was mostly the same: failure to demonstrate that the proposed rules are designed to prevent fraudulent and manipulative acts and practices.
What’s in It for Crypto-Industry?
Surely the effect a Bitcoin ETF introduction would have on the industry is complex, but there are several most straightforward points to it.
Bitcoin ETFs will allow traditional market participants to invest in Bitcoin without wallets, crypto-exchanges, and other complications. Ideally, with an ETF, investors wouldn’t have to bother about their assets’ safety, as well as platform hacks, scams or phishing. Such an ETF would also provide investors with all the benefits of the securities markets, including protection and accountability required by securities laws.
Being more attractive to traditional investors, than a direct Bitcoin purchase, Bitcoin ETFs are expected to drive large investments into the crypto-industry. This, in turn, is a part of the institutionalization, integration between traditional finance and cryptocurrencies. Hopefully, such “legitimization” and acceptance of Bitcoin would result in mass adoption, which is considered to be a good thing.
Although, some experts don’t like the idea of ETFs or even the idea of big-time investors’ money getting into crypto. As such, Nick Szabo, a famous cryptographer voiced his concerns:
“I for one am not lobbying for an ETF or for Wall Street-managed money in general. It might cause more problems than it’s worth.”
Bitcoin evangelist Andreas Antonopoulos called it “a terrible idea” and mentioned that ETFs may lead to the centralization of the cryptocurrency market and make it susceptible to manipulation by institutional investors.
All in all, the actual direct effect of ETFs on the crypto-industry is yet to be observed. Until then, it seems there are a lot of things to be done if we are to ever see Bitcoin ETFs on regulated public markets.
On a positive note, the SEC Commissioner Robert Jackson Jr. said in February that eventually someone will hopefully “satisfy the standards” laid out by the Commission.
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