Bitcoin ETFs Not Quite Dead Yet

August 24, 2018

On Thursday, the Securities and Exchange Commission announced it would review the decision to reject nine bitcoin ETFs that the commission had handed down the previous day.

As ETF.com reported, on Wednesday, the SEC disapproved nine futures-backed bitcoin ETF proposals from three issuers: GraniteShares, Direxion and ProShares (read: "SEC Rejects 9 Bitcoin ETF Proposals").

The filings were notable in that each issuer had included at least one inverse offering, while the Direxion one had included leveraged and inverse offerings.

According to letters published and sent to the exchanges on which the ETFs would have listed, the SEC will now review its disapproval orders, though it is not yet clear why the review was ordered or when it would be complete.

"The Office of the Secretary will notify you of any pertinent action taken by the Commission," stated the letters, addressed to the legal counsel of The NYSE Group and Cboe Global Markets and signed by Brent J. Fields, Secretary of the SEC.

In addition, SEC Commissioner Hester Peirce noted on Twitter Thursday afternoon that the decision to disapprove the proposals would be stayed until the review was completed.

Stays Are Rare, But Do Happen

Typically, the SEC delegates all routine decisions regarding the approval or disapproval of pending exchange-traded products to its Investment Management or Trading and Markets Divisions. Usually these decisions remain in place, but in rare cases, the commission may issue a stay.

For example, in May 2017, the SEC had stayed a previous decision to allow two quadruple-leveraged U.S. equity market funds, one long and one short, both proposed by ForceShares. That stay was never lifted, and the funds remain in regulatory limbo more than a year later.

However, given the investor and issuer enthusiasm for a bitcoin ETF—26 potential funds have been proposed in recent years, according to Bloomberg—it is unlikely Thursday's order will go quietly into the night.

SEC Takes A Second Look

In the case of the nine proposed bitcoin ETFs, the SEC delegated to its Trading and Markets Division. Peirce announced the stay of that decision on her Twitter feed.

"The Commission (Chairman and Commissioners) delegates some tasks to its staff," Peirce wrote. "When the staff acts in such cases, it acts on behalf of the Commission. The Commission may review the staff's action, as will now happen here."

Peirce is notable as the only commissioner to dissent from the order disapproving the Winklevoss bitcoin ETF last month (read: "SEC Again Rejects Winklevoss Bitcoin ETF").

In her dissent of that order, she wrote that the SEC's decision was overstepping its "limited role" and potentially stunting growth in the cryptocurrency market, writing, "The Commission’s interpretation and application of the statutory standard sends a strong signal that innovation is unwelcome in our markets, a signal that may have effects far beyond the fate of bitcoin ETPs."

Why The Proposals Were Rejected

The nine proposed ETFs now under review would be backed by bitcoin futures contracts, which began trading on the CME and Cboe exchanges in December 2017 (Cboe Global Markets is the parent company of ETF.com).

In Wednesday's disapproval order, the SEC had noted concerns about manipulation, and said that NYSE Group and Cboe had not demonstrated they had sufficient rules in place to prevent "fraudulent and manipulative acts and practices."

The SEC had also cited the still-small size of the bitcoin futures market as a concern, saying there was "insufficient evidence" to determine whether Cboe or CME bitcoin futures were well-traded enough to support an exchange-traded product.

Instead, a surveillance-sharing agreement with a large, well-regulated bitcoin market would have been necessary to allay the commission's concerns. But that agreement would be impossible, as no such market exists for bitcoin, the vast majority of which is traded in overseas, unregulated, all-digital venues of indiscernible size.

It is unclear what, if anything, has changed about the SEC's opinion or what element of the disapproval orders the SEC has decided warrants further review.

Other Proposals Also Still Active

Two other bitcoin ETF proposals remain before the SEC: one from Bitwise Asset Management and one from VanEck and SolidX.

In July, Bitwise filed for an ETF that would track an index of the 10 largest cryptocurrencies. It's the first filing to propose tracking several cryptocurrencies, instead of just bitcoin (read: "1st Crypto Index ETF Filed").

Meanwhile, the VanEck/SolidX fund, which was filed in June, would be a physically backed bitcoin ETF, somewhat like the Winklevosses' proposed fund. This ETF, however, would be insured and set the initial price of the fund at $200,000 in order to encourage institutional participation (read: "VanEck, SolidX Team Up On Bitcoin ETF").

That distinction may be key, considering Peirce had also written in her dissent on the Winklevoss ETF: "More institutional participation would ameliorate many of the Commission's concerns with the bitcoin market."

Earlier this month, however, the SEC said it would delay its decision on the VanEck fund until Sept. 30.

Contact Lara Crigger at [email protected]

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