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.
Biggest winner and loser in the top 20
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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