The demands for the establishment of a bitcoin exchange traded-fund (ETF) have been revolving around the crypto space for quite a long time. Major demand for this comes from the institutional investors who want to enter the game of cryprocurrencies. But over the time, little acceptance has been shown by the regulatory bodies concerning cryptocurrencies. Major regulatory body overseeing the establishment of a bitcoin exchange traded fund, the United States Securities and Exchange Commission (SEC), has not been quite in favor of establishing such a crypto-linked ETF.
Proposals for listing a bitcoin exchange traded-fund by various organizations have been denied by the SEC over time. After the rejection presented to the proposal made by the Winklevoss twins, the SEC has denied more such proposals presented forward by ProShares, GraniteShares and Direxion. The major reasons for rejecting these proposals are again the same, manipulation and fraudulent activities prevalent in the cryptocurrency world. This clearly highlights SEC’s major goal of the protection of the investors wanting to invest in this game.
In January, the regulatory body SEC put forward its major concerns regarding the establishment of a bitcoin ETF. Major concerns were regarding the issues of valuation, liquidity, custody, arbitrage and potential manipulation and other risks. Regarding the issue of manipulation, it was stated by the SEC that:
The Commission has also discussed concerns relating to the risk of fraud and manipulation in cryptocurrency markets in orders denying exchange proposals to list the shares of commodity trusts that would hold cryptocurrency. In addition, a number of recent media reports have highlighted a range of possible vectors for potential manipulation of cryptocurrency markets. Although some funds may propose to hold cryptocurrency-related products, rather than cryptocurrencies, the pricing, volatility and resiliency of these derivative markets generally would be expected to be strongly influenced by the underlying markets.
Keeping these concerns in mind, SEC previously rejected the proposal made by the Winklevoss twins. The proposal was also backed by Bats BZX, but unfortunately, it could not see the light of day. The regulatory body also clarified that it has nothing against the blockchain technology that lies at the core of cryptocurrencies, rather it is more involved in protecting the investors of this market from possible manipulative and fraudulent activities. It was stated by the regulatory body that:
Although the Commission is disapproving this proposed 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. Rather, the Commission is disapproving this proposed 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.
A commissioner at the SEC itself dissented the decision made by the regulatory body concerning the proposal of the Winklevoss twins. It was stated by the commissioner Hester M. Peirce that the SEC is not quite favoring the technological advancements by rejecting such an ETF.
The Commission’s mission historically has been, and should continue to be, to ensure that investors have the information they need to make intelligent investment decisions and that the rules of the exchange are designed to provide transparency and prevent manipulation as market participants interact with each other. The Commission steps beyond this limited role when it focuses instead on the quality and characteristics of the markets underlying a product that an exchange seeks to list.
Besides rejecting the proposal made by the Winklevoss twins, the SEC also held off from its decision concerning the proposal made by VanEck/SolidX for the establishment of a crypto-linked ETF.
In order to establish a positive environment for the establishment of a bitcoin ETF, VanEck also presented a public letter to the SEC explaining the role of a crypto-linked ETF in the resolution of the concerns raised by the regulatory body itself. It was stated in the letter that an ETF would be beneficial for the investors of this space as a whole.
…by offering investors exposure to bitcoin through a regulated investment product, we believe the proposed ETF will be consistent with the Securities and Exchange Commission’s (the “Commission”) mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
Another major reason presented forward by the SEC for rejecting a bitcoin ETF is the lack of regulation that prevails in the crypto market. Unless these major issues of manipulation and lack of regulation are solved, a major delay is expected to occur in the establishment of a bitcoin ETF.
The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. 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.
The chief executive officer of BKCM, Brian Kelly, previously suggested that the chances of a crypto-linked ETF getting established in 2018 are very low.
I also hope there is an ETF. But I think the chances of a bitcoin ETF in 2018 are relatively low. There is still quite a few things. That doesn’t stop speculation on that.
All in all, SEC has not been quite supportive concerning the establishment of a bitcoin ETF, and it becomes more evident as continuous rejections are being given to such proposals. Unless the SEC feels that the crypto market is safe enough for the investors, it seems that the approval of a bitcoin ETF isn’t anywhere in sight.