SEC Rejects 9 Bitcoin ETF Applications

SEC rejects 9 Bitcoin ETF applications in an unexpected move, as markets absorb the news. What is the reasoning behind this decision? 

23 August, AtoZ MarketsThe US Securities and Exchange Commission has made its decision regarding nine Bitcoin exchange-traded fund (ETF) applications from three different applicants. 

SEC Rejects 9 Bitcoin ETF Applications

As per the three different orders that have been published on the regulatory website, the SEC has moved to reject all nine applications. The decisions emerge on the day ahead of the expected deadline for the decision for ProShares’ ETF rule change proposal. 

However, instead of making a single decision about ProShares’ proposals, the regulator has decided to reject other seven proposed ETFs as well. These are five proposals from Direxion and two proposals from GraniteShares. 

As the reasoning for all three disapprovals, the SEC has stated the following:

“[T]he Commission is disapproving this proposed rule change because, as discussed below, the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular, the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”

What is the reason for SEC Bitcoin ETF Rejection?

The regulator has reinforced its concerns about inappropriate “resistance to price manipulation” in an insufficiently sized Bitcoin derivatives market. In the case with ProShares’ ETFs and with other two orders, the watchdog has noted:

“Among other things, the Exchange has offered no record evidence to demonstrate that bitcoin futures markets are ‘markets of significant size.’ That failure is critical because, as explained below, the Exchange has failed to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, and therefore surveillance-sharing with a regulated market of significant size related to bitcoin is necessary.”

The registration statement from the SEC in March 2018 has outlined that “the [ProShares] Funds do not intend to hold Bitcoin Futures Contracts through expiration, but instead intend to either close or ‘roll’ their respective positions.” This point had been specifically highlighted as a potential risk for the two ETFs from ProShares. This is in addition to “extreme volatility and low liquidity” that is present in both Bitcoin spot and derivatives market. 

SEC’s Concerns

In today’s orders, the SEC has stated:

“[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.”

The decisions from SEC are mirroring the worries the regulator had expressed in its initial rejection of another Bitcoin ETF application from Winklevoss brothers in March 2017:

”When the spot market is unregulated –– there must be significant, regulated derivatives markets related to the underlying asset with which the Exchange can enter into a surveillance-sharing agreement.”

Earlier this July, the SEC has also rejected the petition from the twins after their initial application denial. 

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