A brief history of the assessments by the SEC of Bitcoin ETF proposals

It may only take a few years, but the history of Bitcoin exchange-traded funds (ETF & # 39; s) and the Securities and Exchange Commission (SEC) in the United States is long. In March 2017, the SEC rejected the application for a Bitcoin ETF proposed by the Winklevoss twins, claiming that the underlying Bitcoin market was still too manipulable, volatile and resistant to surveillance. Fast forward to March 2019 and the SEC still has to approve one Bitcoin ETF, the comments in the last public consultation remaining largely negative.

Such an absence of great progress can seem deadly daunting to chance observers in the hope that an ETF crypto will provide additional legitimacy. Nevertheless, the intervening period between March 2017 and today has witnessed a softening of the SEC's attitude, with committee members even going so far as to state that they expected a Bitcoin ETF to be approved sooner or later. There is, therefore, sufficient reason to draw hope from the recent contacts of the SEC with Bitcoin ETF applicants, even if the longer-term history shows that the committee has not always taken a favorable view of crypto.

2017: SEC claims manipulatability, volatility and absence of surveillance

On June 30, 2016, the Bats BZX Exchange submitted a proposed rule change to the SEC, which would have allowed it to list and trade in shares of the Winklevoss Bitcoin Trust. If approved, the Winklevoss ETF would be the first Bitcoin exchange-traded fund licensed to appear on a fully regulated stock exchange, making it possible for the layman to gain exposure to Bitcoin without the cryptocurrency or the struggle with crypto actually having to possess exchanges or portfolios.

Undoubtedly this would have been a major step towards the mainstream for crypto, but after a long period of deliberation and consultation, the SEC rejected the proposed rule change. On March 10, 2017, it released a statement explaining the reasoning behind its decision, with the difficulty of preventing manipulation and fraud at the top of the list.

"Based on the record for it, the Commission believes that the important markets for bitcoin are not regulated, since the Exchange has not yet started and would not be able to enter into the type of shared use supervision agreement at the moment. with regard to all previously approved ETP Confidential Goods Agreements that help to relieve concerns about fraudulent or manipulative acts and practices in this market – the Commission finds the proposed regulatory change inconsistent with the Exchange Act. "

Just two weeks after this judgment was published, the SEC denied a similar proposal filed by NYSE Arca, which is owned by the Intercontinental Exchange and that the SolidX Bitcoin Trust wanted to mention ETF. Many of the same sentences and statements were reused, the committee wrote on March 28: "it finds the proposal inconsistent with Article 6 (b) (5) of the Exchange Act, which requires, among other things, that the rules of a national stock exchange are intended to prevent fraudulent and manipulative acts and practices. "

As the two above episodes imply, 2017 was not a particularly good year for Bitcoin ETF & # 39; s or the idea that the SEC might be inclined to license one of them – because, in addition to SolidX and Winklevoss, an ETF from Grayscale Investments van Barry Silbert was registered with the SEC in January 2017, and it went no better than his rivals. On 22 March, after having received three comments – all negative – from members of the public, the postponement was postponed, and then in September of the same year, it withdrew its application, citing a lack of "regulatory developments" in the crypto market as the main reason for this promotion.

Between March and September, the public sent the SEC additional comments as part of the consultation, and while they ultimately only counted 21 in total, some of them provide insight into why Grayscale Investments would probably not get approval for its ETF at that time.

For example a letter of seven pages from Mark T. Williams, a professor of finance at the University of Boston, describes a long list of reasons why a Bitcoin ETF – especially from Grayscale investments – was not appropriate. These are Bitcoin market errors, such as "poor pricing, irregular trade execution, shallow trading volume, hoarding, relatively low liquidity, hyper-price volatility, a worldwide web of unregulated buckets-shop buckets, high bankruptcy risk and excessive exposure to trade and price discovery in countries outside the jurisdiction of the SEC. "Nevertheless, Williams also noted that Digital Currency Group – which owns Grayscale Investments and Coindesk (among other companies) -" is fraught with inherent conflicts of interest. "

But although this would suggest that there was a strong opposition to this specific ETF, other researchers outside the cryptocurrency industry were more positive. "The move from bitcoin trading activities to regulated exchanges in the US will improve pricing and reduce the potential for manipulation and money laundering," James J. Angel, associate professor of finance at the University of Georgetown.

The same, Professor Campbell R. Harvey of Duke University (and colleague & # 39; s) wrote that "allowing the Bitcoin Investment Trust to list its shares on the NYSE Arca as a bona fide Exchange-Traded Product (& # 39; ETP & # 39;) would show that the Commission is fully committed to achieving its Objectives: Protect Investors, Maintain Efficient Markets and Help Capitalize Given that six other economists from six other American universities signed this statement, it turned out that the idea of ​​a Bitcoin ETF was in fact supported considerably even if the SEC could not be dismantled from his opinion that the market for cryptocurrency was still too anarchistic to approve such a fund.

2018: growing support from the wider industry

When 2017 ended, there was a very real sense that the SEC was suspicious of the Bitcoin market and that its skeptical view of the market was reinforced by a significant portion of the comments it had received from people outside the crypto industry. However, this unfavorable situation gradually began to change in the course of 2018 because, although the SEC continued to reject Bitcoin ETF & # 39; s, dissenting voices from the committee emerged.

This was most evident in July, when the SEC – for a second time – rejected the Winklevoss Bitcoin Trust for offer by the Bats BZX Exchange. Again, he judged that Bats' proposal could not prove that it was consistent with rules "designed to prevent fraudulent and manipulative acts and practices." However, it took the unusual step of adding a rejection to this rejection and wrote: "Although the Commission rejects this proposed rule change, the Commission emphasizes that its rejection does not depend on an assessment of whether Bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment. "

Even more important, Hester Peirce (now called "Bitcoin Mom" ​​by the community) from this decision, despite the fact that she was a member of the SEC. On July 27 she wrote:

"The rejection order focuses on the features of the bitcoin spot market, rather than on BZX's ability to – based on its own rules – trade in and control manipulation of the ETP shares listed and traded on BZX , to monitor. "

This open criticism from a SEC commissioner pointed to a subtle turn of the tide in favor of Bitcoin ETF & # 39; s. And while one of the comments made during the brief SEC consultation in May was reluctantly hostile to the Winklevoss ETF, most were supportive. More importantly, the supporting letters and comments do not always come from people who work directly in the crypto industry, with four companies that are active in the global market for stock marketed products and who stand for an important testimony.

For example, C & C Trading concluded in its comments that it "recommends the COIN ETF list and believes it is an innovative product for investors and market professionals to trade", with the ETF marketmaking specialist also adding that many existing ETF & # 39; "are based on opaque and illiquid underlying instruments."

Despite the fact that wider industry and public opinion generally warmed the Bitcoin ETF & # 39; s idea, it was not surprising that 2018 set the record for the number of proposals rejected by the SEC. On 22 August alone, the committee rejected nine applications, including Direxions, ProShares and GraniteShares whose applications were rejected (and in some cases more than one application). And again, the SEC usually explained these rejections in terms of not proving that applicants' rules were "designed to prevent fraudulent and manipulative acts and practices."

The fact that the committee remained fixed in this respect is not surprising, not least because this decision quickly followed the publication of properly damaging research into cryptomarket manipulation. In June, researchers from the University of Texas issued a paper concluding that manipulation of Tether and Bitfinex was responsible for about 50 percent of Bitcoin's price increases in 2017. Barely a month earlier, the US Department of Justice had opened a criminal investigation into Bitcoin price manipulation. At the beginning of August, the Wall Street Journal published a study that found that price manipulation was mainly perpetrated by "trade groups" using Telegram and other messaging services.

2019: Increased hope despite reduced momentum

In the light of all this negative publicity, it is not surprising that the SEC continues to refuse the approval of a Bitcoin ETF. And although nothing has changed substantially in 2019 (and so far no ETF has been approved), there is again an increased reason for hope.

In February, Robert J. Jackson Jr. – a commissioner at the SEC – stated that he expects the commission to license a Bitcoin ETF sooner or later.

"Do I think somebody will eventually meet the standards we have set there? I hope so, and I think so. & # 39;

The same month, a Commissioner at the Commodities and Futures Trading Commission (CFTC) criticized the SEC for having rejected previous ETFs due to potential price manipulation. Speaking at the BiPartisan Policy Center in Washington D.C. Brian Quintenz said:

"There are mathematical ways to design a contract through a settlement index where, even if there is not much liquidity on a stock exchange referred to, the index itself is not easily prone to manipulation."

Added to the constant support of Hester Peirce for the crypto industry, such comments point to a climate in which the SEC is gradually becoming more receptive to the idea of ​​a Bitcoin ETF, despite Peirce's warning in December 2018 that an approval could take longer than some people hope.

Indeed, an approval can take some time, because the forecasts for the ETFs currently under assessment do not look particularly encouraging. In February, Reality shares withdrew their own ETF confidence after the SEC encouraged it to do so, largely because the ETF took the unusual step of combining Bitcoin futures, sovereign debt instruments and money market funds into one derivative. And while there was some hope for the Chicago Board Options Exchange (CBOE) CBOE application for a Bitcoin ETF, this was tempered by the largely negative response from the public to the application.

Of the 18 comments submitted so far (between 13 February and 31 March), only three were in favor of the ETF. However, it would be extremely inconvenient to conclude on the basis of 15 disapproving remarks that the general public or the wider financial sector is increasingly exhausting the idea of ​​a Bitcoin ETF. That is because some of these comments have no real credibility, either at best extremely minimal (for example here, here and here) or outright inconsistent in the worst case (for example here, here and here). As for the other, although they generally argue their points with more depth and accuracy, they are all from recurring commentators.

For example, the two contributions of a "Sam Ahn" are his eighth and ninth, while "investment professional" Jonathan Harris has sent at least two very similar letters with general Bitcoin skepticism, as well as one from April 2017.

This return of deep-rooted critics undermines any suspicion that the opposition to a Bitcoin ETF could somehow grow. It is, however, discouraging to note that there has not really been a significant contribution to the consultation on the most recent application of CBOE. Although it is difficult to conclude on the basis of a single proposal, this may indicate that pressure on an ETF loses some momentum – or, in any case, publicity. At the very least, the interest of the general public and of industries outside the crypto may diminish, even though the cryptocurrency industry lags behind the idea.

And even if interest rates fall, this is probably due to the recognition that it is not the letters from the public that will now affect the SEC, but the actual evolution in the maturation and regulation of the cryptocurrency industry. And since there have been multiple developments in this area – from the United States to Russia and Japan – it is probably only a matter of time before the SEC approves its first Bitcoin ETF.

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