This Thursday, the cryptocurrency world witnessed the rejection of the proposal for the establishment of a bitcoin exchange traded-fund (ETF) made by Winklevoss Twins by the SEC, for the second time around. This result saw bitcoin’s value drop immediately in the market, with a severe backlash from various major investors of the cryptocurrency universe, who were hoping to see stability in the market after the establishment of a crypto-linked ETF. But not so shockingly, this decision was also shown dissent by U.S. Securities and Exchange Commission’s very own commissioner, Hest M. Peirce.
SEC’s very own commissioner, Hester M. Peirce was of the view that by denying the establishment of such an ETF, the agency is not fulfilling its incumbent duties. The agency is responsible for providing the investors and institutions with a stable platform to perform operations. She stated that:
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.
As the future of cryptocurrency is not something one can predict, the need of the hour is to control the situation present at hand. Peirce was of the view that instead of thinking too much about the viability of cryptocurrency in the time that is yet to come, the SEC should cater to the current scenario first.
By precluding approval of cryptocurrency-based ETPs for the foreseeable future, the Commission is engaging in merit regulation. 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.
The decision was made by the SEC in the hindsight of all the illegal activities that have been propagating in the world of cryptocurrency. The SEC is of the view that the activities taking place across the crypto space are largely fraudulent and manipulative, and more steps are needed ensure security for the institutions. It was stated in the official document of rejection by the SEC 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.
The argument made by the SEC, regarding the fraudulent and manipulative acts happening across the cryptocurrency world, was countered by Peirce in the official dissent document. She stated that SEC had previously approved many of the exchange traded-products (ETPs) in the past that had also been subject to the such issues of manipulations and this is not something new.
Regarding the concern of protecting the institutions, Peirce suggested that by rejecting the proposal of the establishment of a crypto-linked ETF, SEC is not protecting them, but instead, is making them more prone to harmful consequences, as they will not be able to access this major portion of the modern financial market. She stated that investors should be given the option of deciding themselves whether something is useful for them or not.
In sum, I would rather we err on the side of approving products so that investors, who are generally better judges about these things than we are, can form their own views about a particular innovation and act on those views in the market.
She also stated that:
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.
As the need of a crypto-linked ETF grows bigger and bigger everyday, the demands for its establishment cannot be denied for too long. Although SEC might be slightly reserved concerning the establishment of a cryptocurrency-based ETF as of now, but as seen from the dissent shown by the agency’s very own commissioner, if not by the end of the year, it will eventually become inevitable to build such an ETF in the near future.