Thursday, July 26 might go down as a severe setback for the prospect of bitcoin exchange-traded funds (ETFs). For the second time, the same major trust applying for bitcoin ETF approval was rejected by the United States Securities and Exchange Commission (SEC). SEC Release No. 34-83723, File No. SR-BatsBZX-2016-30 formally denied the Winklevoss Bitcoin Trust ability to list and trade shares. The decision comes amidst high levels of optimism toward bitcoin ETF approval as soon as next month. At least one SEC official does not agree with her colleagues’ decision.
Bitcoin ETF Rejected by SEC, Commissioner Dissents
The SEC published its decision to deny a major bitcoin trust the ability to list and trade shares as an ETF. In a 92 page explanation, the US’s primary regulator of such markets rejected a rule change at the behest of Bats BZX Exchange. The proposed change would have allowed bitcoin tethered investment products.
Bats BZX finds itself in nearly the exact same position as last year, when it was rejected the first time. On appeal, Bats’ petitioning brought with it robust public commenting in hope of changing the agency’s mind.
Perhaps a positive indication for enthusiasts is how the SEC stipulated to not have prejudice necessarily against cryptocurrencies. Their latest decision places blame on the proposal rather than its particular elements. Though it is rejecting the application and rule change, “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,” the SEC assured.
They’re kicking back the rule change “because, as discussed in detail below, BZX 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), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices,” tantalizingly noting how in time, “regulated bitcoin-related markets may continue to grow and develop.”
Not Everyone at the SEC in Agreement on Latest Bitcoin ETF Rejection
ETFs are considered, among cryptosphere cheerleaders for mainstream adoption, something like the holy grail of financial investment products. Exchange traded funds can be listed on legacy boards such as the New York Stock Exchange in much the same way as conventional stocks. The bitcoin variety would likely be a basket of different crypto investments, diversified and relatively low cost like mutual funds. That diversity is believed to be less risky, not to mention saving less crypto savvy investors the trouble of picking which to purchase. And, especially with regard to decentralized digital assets, the complication of holding keys, a wallet, and figuring out custody or storage is all taken care of. Retail investors are very familiar with ETFs.
The SEC expanded on its reasoning, explaining how “existing or newly created bitcoin futures markets may achieve significant size, and an ETP listing exchange may be able to demonstrate in a proposed rule change that it will be able to address the risk of fraud and manipulation by sharing surveillance information with a regulated market of significant size related to bitcoin, as well as, where appropriate, with the spot markets underlying relevant bitcoin derivatives.”
However, not everyone at the SEC was on board with the recent decision to deny bitcoin exchange traded funds. “By precluding approval of cryptocurrency-based ETPs for the foreseeable future, the Commission is engaging in merit regulation,” Commissioner Hester M. Peirce wrote in a published dissent from her colleagues. “Bitcoin is a new phenomenon, and its long-term viability is uncertain. It may succeed; it may fail. The Commission, however, is not well positioned to assess the likelihood of either outcome, for bitcoin or any other asset. Many investors have expressed an interest in gaining exposure to bitcoin, and a subset of these investors would prefer to gain exposure without owning bitcoin directly.”
Echoing sentiment among enthusiasts and crypto investors alike, the Commissioner wrote how such a product “based on bitcoin would offer investors indirect exposure to bitcoin through a product that trades on a regulated securities market and in a manner that eliminates some of the frictions and worries of buying and holding bitcoin directly. If we were to approve the ETP at issue here, investors could choose whether to buy it or avoid it. The Commission’s action today deprives investors of this choice. I reject the role of gatekeeper of innovation—a role very different from (and, indeed, inconsistent with) our mission of protecting investors, fostering capital formation, and facilitating fair, orderly, and efficient markets. Accordingly, I dissent,” Commissioner Peirce stressed.
What do you think this means for the future of ETFs? Let us know in the comments section below.
Images via Pixabay, SEC.
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Author: C. Edward Kelso