man checking bitcoin price on a laptop and phone

Welcome back to your daily Block Explorer crypto roundup. Today’s focus is Bitcoin ETFs and why the SEC keeps knocking them back.

The Securities and Exchange Commission (SEC) rejected yet another bitcoin exchange-traded fund (ETF) proposal on Wednesday. In fact, it shut down nine proposals at once.

As Block Explorer News previously reported, the SEC faced a deadline on the ProShares Bitcoin ETF which it could no longer push back.

Nine bitcoin ETF rejections in 24 hours

In addition to the two ProShares applications, the SEC rejected two proposals from GraniteShares and five from Direxion.

Earlier this month, the US regulator delayed its decision on a VanEck and Solid X ETF. Before that, they denied a bitcoin ETF proposal from Tyler and Cameron Winklevoss (for the second time).

So what exactly is going on? Why is the SEC pushing back so hard?

It has nothing to do with bitcoin itself

Throughout its many rejections, the SEC has been quick to point out that it has nothing to do with bitcoin’s functionality:

“[The agency] 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.”

Problem 1: market size

Most of the bitcoin ETF proposals (except the VanECK ETF) track the bitcoin futures market, not bitcoin itself. The SEC says that’s a problem because the bitcoin futures market is too small:

“Among other things, the Exchange has offered no record evidence to demonstrate that bitcoin futures markets are ‘markets of significant size.’”

Bitcoin futures were only introduced in December 2017, so the market has not yet grown to the size of other mature markets. (It has only 2.5% the volume of the silver futures market, for example).

Problem 2: manipulation and fraud

Ultimately, this is the SEC’s biggest concern. The ETFs were rejected because they did not meet the Exchange Act requirements, in particular:

“The requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”

Price manipulation remains an underlying issue for the SEC.

Problem 3: bitcoin volume outside the US

Three-quarters of bitcoin trade activity takes place outside the US. That makes it difficult for the SEC to ensure “significant investor protection.”

Problem 4: wild swings on exchanges

Although this wasn’t addressed directly by the SEC, it has been suggested that an ETF is more likely to be accepted if crypto exchanges worked together. Some offer wildly different prices for the same asset while keeping true market data behind closed doors. The SEC is likely to want more transparency before approving an ETF.

Is there any hope for a bitcoin ETF?

The SEC hit a slightly more optimistic tone in the latest round of rejections. It hinted that a bitcoin ETF might provide a safer method for entering the market, compared to buying the asset itself:

“The Commission acknowledges that, compared to trading in unregulated bitcoin spot markets, trading a bitcoin-based ETP on a national securities exchange may provide some additional protection to investors, but the Commission must consider this potential benefit in the broader context of whether the proposal meets each of the applicable requirements of the Exchange Act,”

Bitcoin prices drop in response

After the Winklevoss rejection and the VanEck delay, the price of bitcoin collapsed. It seems today, however, traders are more realistic, having priced in the high likelihood of rejection. Bitcoin is down 3.5%, but it’s a far cry from the steep drops we saw after previous rulings.

1. Bitcoin – $6,459 (- 3.5%)
2. Ethereum – $274 (- 4.5%)
3. XRP – $0.32 (- 5%)

Biggest winner and loser in the top 20

Litecoin logo

Biggest winner – Litecoin (- 2.48%)
Biggest loser – IOTA (- 8.5%)

Although they’re both in the red, litecoin and bitcoin are proving strongest in the market today. In volatile moments, traders are likely to stick to the “safe” crypto havens.

That’s all for today’s roundup. We’ll be back tomorrow with more updates from the world of crypto and blockchain.

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Motivations for a Bitcoin ETF

As Bitcoin matures into a viable asset class investors demand easier ways to join the burgeoning market. Apart from retail interest, institutions have billions of dollars on the sidelines patiently waiting to enter the market.

The S-1 filing describes shares of the ETF to be “Easily Accessible and Cost Efficient.”  The Winklevoss Bitcoin Trust will allow investors to avoid the process of purchasing bitcoins on exchanges and having to handle security and storage. Shares would trade just like stocks, allowing mainstream investors to enter the market through an existing broker easily.

SEC Ruling: Winklevoss’ ETF Denied

Recently, the SEC denied The Winklevoss’ Bats BZX Exchange, Inc. (BZX) second ETF proposal. The Commission was careful to emphasize that the decision denying a Bitcoin ETF does not rest on evaluating whether or not bitcoin has inherent value.

Manipulation Still a Primary Concern

The SEC has yet to approve a digital currency-based ETF. In the latest decision, the SEC noted that more than 75% of the volume of bitcoin trading occurs outside the U.S., with only 5% of trading taking place on U.S. exchanges. Many overseas exchanges are unregulated, making markets susceptible to illegal market manipulation strategies such as wash trading.

SEC Commissioner Dissents

According to Commissioner Hester Peirce, the disapproval order focuses on the characteristics of the spot market for bitcoin, rather than on the ability of BZX to surveil trading of and to deter manipulation in their listed shares. Peirce noted if the disapproval order’s rigorous standard were applied consistently, many commodity-based ETFs would not pass.

Approval of this order would demonstrate the SEC’s commitment to acting within the scope of their limited role in regulating the securities markets. The disapproval denies investors from accessing Bitcoin through a predictable, transparent, and simplified product.

 100% Chance of a Bitcoin ETF

 The Winklevoss twins aren’t alone in the Bitcoin ETF space. On July 24th, the SEC delayed its decision on a separate Bitcoin ETF application from investment firm Direxion. Bitwise also filed its own application that would track an index of ten cryptocurrencies.

Jan van Eck, CEO of VanEck Associates is 100% certain the SEC will pass a Bitcoin ETF in the long run. The VanEck, Cboe, and SolidX partnership currently awaits SEC ruling on their proposed Bitcoin ETF. VanEck is hopeful of gaining approval addressing the SEC’s concerns here. Mark your calendars — the ruling is expected to occur between August 10th and 16th.

Conclusion

The disapproval order unintentionally undermines investor protection, precluding investors from benefiting from the increased institutional discipline that comes with approval. Bitcoin markets are steadily maturing, and mainstream finance is knocking at the door. Mass adoption is so close yet so far.

sec

The US Securities and Exchange Commission (SEC) has thrown cold water on exchange-traded fund (ETF) providers jockeying to list the first bitcoin ETF.

Thought to be a game-changer for cryptocurrency adoption, bitcoin ETFs would provide investors with the ability to obtain exposure to the flagship cryptocurrency through a conventionally-wrapped investment product.

Fund providers have sought SEC approval for cryptocurrency-derived ETFs for years, but the SEC has been reluctant to lend its approval to these products, which would likely be popular among retail investors.

The rush to list a bitcoin ETF intensified following the launch of the first bitcoin futures contracts, as the general consensus among analysts was that the SEC would quickly approve a fund that invested exclusively in futures contracts, which currently trade on two regulated US exchanges.

However, several recent developments indicate that this may not be the case.

Most recently, the SEC sent two investment industry trade groups a lengthy letter outlining a number of “significant investor protection issues” that fund sponsors must answer before the agency will consider approving a bitcoin ETF.

“We believe…that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors,” Dalia Blass, director of investment management at the SEC, wrote in the letter, which was dated Jan. 18.

Blass said that the SEC was chiefly concerned about the liquidity of the futures markets, as well as how to assign a fair market value to what would be intensely-volatile products. However, she also touched on a variety of other topics, including market manipulation, custodial issues, and arbitrage.

“[T]he innovative nature of cryptocurrencies and related products, as well as their expected use and utility in our financial markets, means that they are, in many ways, unlike the types of investments that registered funds currently hold in substantial amounts. In light of these considerations, we have, at this time, significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy” federal securities laws, Blass said.

Earlier this month, the SEC reportedly asked fund providers to voluntarily withdraw their bitcoin ETF applications, citing some of the concerns outlined in the letter above.

Notably, the agency also pressured the first blockchain-focused funds to remove the word “blockchain” from their names, although these ETFs — which primarily invest in companies experimenting with blockchain technology — were allowed to begin trading this week after complying with this request.

Featured Image from SEC/Flickr