[Editor’s Note: This article was updated.]
The Securities and Exchange Commission has rejected VanEck’s bid to become the first issuer of a physically held bitcoin ETF in the U.S., marking the latest defeat in the cryptocurrency community’s efforts to expand the asset class’ mainstream acceptance.
In a filing Friday morning, the SEC said it was not confident the VanEck Bitcoin Trust could offer protections from the volatile price swings and potential manipulation in the market for the world’s largest cryptocurrency. Regulators were required by law to issue an up-or-down decision on the application by Sunday.
In particular, the regulatory body said Cboe Global Markets, the exchange of choice for the VanEck application, still lacks a surveillance-sharing agreement to detect fraud. That made the application impossible to approve, despite the exchange arguing that the growth of the bitcoin futures market and spot bitcoin liquidity would provide a buffer against the risks in buying into existing bitcoin-based products on over-the-counter-markets.
“Such resistance to fraud and manipulation, however, must be novel and beyond those protections that exist in traditional commodity markets or equity markets for which the Commission has long required surveillance sharing agreements in the context of listing derivative securities products. No listing exchange has satisfied its burden to make such demonstration,” the agency said.
The decision shouldn’t come as a surprise to industry watchers, as the SEC has long been skeptical of allowing ETFs to hold bitcoin ever since the Winklevoss twins made the first application in 2013.
In a statement, CEO Jan van Eck said the firm is disappointed in the denial: "We continue to believe that investors should have the ability to gain exposure to bitcoin through a regulated investment product and that a non-futures ETF structure is the superior approach."
SEC Chairman Gary Gensler reiterated his position in an interview with Yahoo Finance days after the launch of the first U.S.-listed bitcoin ETFs, emphasizing his concerns over investor protections in the crypto space.
“It’s really a matter of bringing as much of this space into the investor protection remit,” he said.
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Laura Morrison, Cboe’s head of ETF listings, said clinching surveillance agreements with the number of exchanges that trade bitcoin around the world would be “daunting,” and a potentially impossible task. More direct regulation over the cryptocurrency exchanges or those exchanges joining the Intermarket Surveillance Group may help alleviate the SEC’s worries, she said.
However, Morrison believes the U.S. is losing ground in the cryptocurrency market compared to other countries that have approved spot bitcoin investment vehicles.
“For us to take this long to be able to provide this type of tool… [i]t does feel a little bit like we're just behind the eight ball,” she said.
Katherine Dowling, the general counsel and chief compliance officer at Bitwise Asset Management, said VanEck didn’t fully provide the research that the SEC wanted to back up the claim that the bitcoin market can resist manipulation.
Bitwise released two white papers alongside its latest filing for a spot bitcoin ETF, concluding in particular that price discovery on the Chicago Mercantile Exchange leads, on average, between 5 and 17 seconds ahead of the 10 largest spot bitcoin markets.
“Even if you don't have the surveillance systems in place, in order to manipulate the market, you would have to be trading on the CME, which is itself a regulated market,” she said.
There are only two options for investors seeking bitcoin exposure through an ETF on the market: the ProShares Bitcoin Strategy ETF (BITO) and Valkyrie Bitcoin Strategy ETF (BTF). Both hold near-month bitcoin futures contracts instead of actual bitcoin.
Gensler has long been in favor of futures-based bitcoin products versus physical ETFs, as those bitcoin futures contracts are regulated under the U.S. Commodity Futures Trading Commission.
BITO was a runaway success when it debuted in early October, drawing the second-largest launch day inflow ever and taking in more than $1.2 billion in AUM in its first two days on the market.
BTF’s launch was muted compared with BITO’s on account of the latter’s not having first-mover advantage.
Other prospective bitcoin futures ETF issuers have paused or withdrawn their filings in recent weeks. Invesco dropped out of the race when it was neck-and-neck with ProShares to be the first to launch, and Bitwise withdrew its filing earlier this week. CEO Matt Hougan explained on Twitter that BITO and BTF have already taken all the excess capacity for near-month contracts with futures merchants, making a near-month bitcoin futures ETF launch difficult.
However, VanEck will launch its Bitcoin Strategy ETF (XBTF) next Tuesday, making the announcement hours after the SEC denial of its spot product.
Contact Dan Mika at [email protected], and follow him on Twitter