The U.S. Securities and Exchange Commission rejected several cryptocurrency-based ETFs in 2018, signaling a reluctance to offer retail investors an opportunity to add bitcoin and other virtual currency as a basket of securities to their…
The U.S. Securities and Exchange Commission rejected several cryptocurrency-based ETFs in 2018, signaling a reluctance to offer retail investors an opportunity to add bitcoin and other virtual currency as a basket of securities to their portfolios.
On Sept. 20, the regulatory agency said it sought more input from the public on the proposed SolidX Bitcoin Shares issued by the VanEck SolidX Bitcoin Trust, another bitcoin ETF. The delay in the decision again means that the earliest decision and announcement from the SEC could occur on Dec. 29.
Another delay is possible, pushing a final decision date of mid-February rather than the second week of March, as was previously expected, says Mati Greenspan, a senior market analyst at eToro, a Tel Aviv-based social investment network.
Bitcoin enthusiasts were faced with disappointing news throughout the summer as none of the bitcoin ETF proposals were approved. In August, the SEC rejected nine proposed bitcoin ETFs initially, but later reversed course and said it would review the decision of two ETFs filed by ProShares that would track bitcoin futures contracts, another from GraniteShare and five leveraged and inverse ETFs from Direxion.
The SEC says the potential for fraud in the bitcoin market was a priority since investors could manipulate prices. The regulatory agency states that the NYSE Arca, which filed the ProShares application, had not met its requirement “that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices. Among other things, the Exchange has offered no record evidence to demonstrate that bitcoin futures markets are ‘markets of significant size.'”
The SEC also stated “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 to satisfy the statutory requirement that the exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”
In July, the regulatory agency turned down the Winklevloss ETF that would have called for trading physical bitcoin, which often is volatile.
The volatility in the bitcoin market has been high. Bitcoin remains lightly regulated and since December has given investors a show, hitting a high of $20,000 before dipping to $8,500 by mid-March and ultimately reaching lows in the $6,000 range, wiping out billions of dollars in market cap because of extreme volatility, hacking and orders from regulators. Large losses are not unusual for bitcoin and other digital currencies.
While a bitcoin ETF may not be a “defining step” for crypto, it could be one strategy to help form a bottom for prices, Greenspan says.
The SEC also halted trading on Bitcoin Tracker One (ticker: CXBTF) and Ether Tracker One (CETHF), two investment products that track cryptocurrencies, on Sept. 9 and ended on Sept. 20 since there was “confusion amongst market participants regarding these instruments.”
In the ruling, the SEC stated that “The commission cautions broker-dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the company.”
These two exchange-traded funds/notes have been marketed as both, which is part of the SEC’s objection and could be out of commission forever, says John Dellaportes, co-chair of the securities litigation and enforcement practice of Kelley Drye, a New York-based law firm.
“There are significant differences between ETFs and ETNs in terms of tax treatment and their risk profile and the SEC does not appreciate broker-dealers who muddy that distinction in marketing materials — hence the suspension,” he said. “Cryptocurrencies are still the wild west. They are only suitable for sophisticated investors with diversified portfolios, who can afford to take limited risks.”
Over the short term, these two products will have “likely suffered reputational harm from the inadequate disclosure,” says John Lore, managing partner of Capital Fund Law, a New York-based law firm that works with cryptocurrency clients. “This would also provide some needed regulatory certainty for other instruments.”
The SEC’s denial on approving bitcoin ETFs displays its skepticism on having these securities in the market.
Until there is a globally coordinated effort to establish and enforce standards for the exchanges, it is unlikely that the SEC will move forward allowing ETFs to be traded, Lore says.
“The SEC cited market manipulation as a key reason for not approving ETFs,” he says. “Market manipulation is a systematic problem that happens at the exchange level because of major deficiencies in the ability and willingness of the exchanges to exercise the needed oversight and control to address rampant abuses.”
The regulatory agency could reverse its stance in the future, Dellaportes says. “Eventually, the market will mature enough such that the SEC will allow bitcoin ETFs.”