On Thursday, the Securities and Exchange Commission voted 3-1 to reject a proposal for a bitcoin ETF run by venture capitalists Tyler and Cameron Winklevoss, demonstrating the regulatory agency's continuing concerns about fraud and manipulation in cryptocurrency markets.
In a filing posted yesterday, the commission expressed skepticism over the reliability and security of bitcoin trading, arguing that there isn't enough oversight in the underlying market and that the filers had failed to prove the token is "resistant to manipulation."
This is the second time in two years that the SEC has rejected the Winklevoss twins' proposal. The SEC first rejected the proposal in March 2017, on much the same grounds. However, in May, the filers submitted a "petition for review" that restarted deliberations (read: "Bitcoin Flying As ETF Gets Second Shot").
Concerns About Oversight
In its rejection, the SEC raised concerns about the reliability of trading and volume data on bitcoin exchanges, noting that more than 75% of bitcoin trading happens on unregulated foreign exchanges.
"The record before the commission indicates that a substantial majority of bitcoin trading occurs on unregulated venues overseas that are relatively new and that, generally, appear to trade only digital assets," the commission wrote.
Nor were bitcoin futures a viable alternative, said the SEC, which stated, "the record does not support a conclusion that bitcoin derivatives markets have attained significant size."
At the same time, the SEC left open the possibility of reversing its stance, should the regulated bitcoin market achieve sufficient size and oversight.
"The Commission notes that regulated bitcoin-related markets are in early stages of their development," wrote the SEC. If and when the bitcoin market matures further, "the Commission would then have the opportunity to consider whether a bitcoin ETP would be consistent with the requirements of the Exchange Act."
Closing The Door To Institutions
The denial poses a setback to those who want to take cryptocurrency investment mainstream, not least of which because an ETF would have opened the doors to investment by institutions and mutual funds.
Most institutional investors have mandates that only allow them to invest in registered securities. Bitcoin isn't yet one of them, but an ETF that held bitcoins would be.
Trading under the ticker COIN, the Winklevoss Bitcoin Trust would have been structured as a grantor trust, much like physical commodity ETFs, and it would have used the Winklevoss's Gemini Exchange to set the price. COIN would have listed on Cboe Global Markets, which is also the parent company of ETF.com.
In the lone dissent of the decision, SEC Commissioner Hester Peirce argued that by rejecting the proposal, the agency was overstepping its intended role to regulate the securities markets.
"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," she wrote in her dissent.
"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," she continued.
‘Innovation Is Unwelcome’
She also argued that, by rejecting the bitcoin ETF proposal, the SEC was stunting growth in the overall cryptocurrency market, thereby reinforcing the lack of investor protections to which the Commission objected in the first place.
"More institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order," she wrote.
"More generally, 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," she continued.
Other Bitcoin ETPs Remain
Several other applications for bitcoin ETFs remain pending before the SEC, including the VanEck SolidX Bitcoin Trust, another physical bitcoin ETF proposal filed in June (read: "VanEck, Solid X Team Up On Bitcoin ETF").
VanEck's proposal contains several features that COIN did not, including insurance held by the trust against the loss or theft of bitcoins, and an initial price per share of $200,000, such that only certain institutions would be able to purchase shares.
It is unclear whether those changes will be enough to prevent VanEck's fund from meeting the same fate as COIN, however.
This week, the SEC delayed deliberations on five additional futures-based leveraged bitcoin ETF filings from Direxion.
Meanwhile, Bitwise Asset Management filed for an index fund that would track the performance of a basket of the 10 largest cryptocurrencies, including bitcoin (read: "1st Crypto Index ETF Filed").
Contact Lara at [email protected]