SEC blocks new Bitcoin ETFs - Newsreel #2
Recently, the SEC (Securities and Exchange Commission) has announced that it rejected Bitwise and NYSE Arca's Bitcoin ETF (exchange-traded fund) application.
My last post took a view on the FCA's pending regulations of cryptocurrencies in the UK, and its implications. Now, I'm going to look further Stateside.
Note: While this news is due a few days, I feel that it's not too late for me to add some of my own thoughts on it, while letting the news sink in a bit.
SEC dismissal of new Bitcoin ETFs.
On October 9th, the SEC published a press release announcing their decision to reject a proposal by Bitwise management and NYSE Arca, for their Bitcoin ETF. This news comes after the rejection for another proposed ETF by VanEck and SolidX; on similar grounds, citing necessary legal requirements to prevent market manipulation.
"Rather, the Commission is disapproving this proposed rule change because, as discussed below, NYSE Arca 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 Exchange Act Section 6(b)(5), and, in particular, the requirement that the rules of a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices.”
Earlier, on March 20th, Bitwise had shared with the SEC a study citing that 95% of volume on cryptocurrency exchanges are faked, and that the real volume is much smaller - around $243 million (as of March 2019).
The Bitcoin Market Is More Orderly and Efficient Than Is Commonly Understood.
Bitwise claims that the value of its ETF would be derived from the "actual" 5% of the market, from 10 reputable exchanges (Binance, Bitfinex, Kraken, Bitstamp, Coinbase, bitFlyer, Gemini, itBit, Bittrex, Poloniex).
In that presentation, Bitwise acquiesced the truth about the cryptocurrency market, while also highlighting continued improvements in making the market more robust; and to help prevent more fraud.
Bitwise continued to hold more meetings with the SEC to gain their understanding. As a follow-up, on September 17th, Bitwise made another presentation for the SEC; to showcase all the improvements and response since their first study published on March 20th.
On an interview with CNBC, Bitwise said it was confident that the SEC would approve of their ETF offering, only days before their rejection verdict.
"We’re closer than we’ve ever been before to getting a Bitcoin ETF approved."
- Matt Hougan, Global Head of Research, Bitwise Asset Management
So, what happens now?
Bitwise seems unshaken following the SEC's rejection for their proposal. In fact, Bitwise intends on refiling their application "as soon as appropriate".
Their continued optimism have brought calm to the crypto markets as well; preventing the sort of bloodbath that sometimes happen when new developments haven't met expectations.
Nevertheless, players in the crypto industry have generally taken 2 sides after the news broke;
- one of optimism, that the market and industry will soon mature to a similar state of traditional financial offerings today;
- or a more pessimistic tone, asserting that the studies done by Bitwise have uncovered new flaws in the market to alarm future regulators.
The other major Bitcoin ETF currently pending the SEC's verdict, is one by Wilshire Phoenix. Their ETF structure attempts to hedge the volatility of Bitcoin's price with Treasury notes.
It's worth noting as well, that the SEC does not see this recent setback as prejudicial to any future decision on cryptocurrency regulations.
Although the Commission is disapproving this proposed rule change, the Commission 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.
Final Thoughts.
While recent ETF verdict is disappointing for myself, and certainly for any crypto enthusiast; I do think that the future continues to bode well for the market and the underlying technology. So, there's good reason to be at least cautiously optimistic.
Markets do take time to mature, with traditional ETFs being no different in its beginnings. Regulators will take their time to ascertain the integrity of any financial product before signing off.
Some of the arguments made by Bitwise do have their merits. Recent reports have no doubt to the allegations that exchange volumes have been manipulated through "wash trading". The Blockchain Transparency Institute (BTI) claims over 80% of the Top-25 exchanges on CoinMarketCap had faked their volumes.
Nevertheless, there are good news in all this; as crypto exchanges are cleaning up their act. BTI's report show that "wash trading" among the Top-40 exchanges have dropped by 35.7% since the start of 2019.
Major data providers such as CoinMarketCap, Messari, OpenMarketCap, Nomics; have also launched new initiatives to report, and improve on the transparency and legitimacy of exchange data. Any data gathered are also published online, as to allow the public to be more informed of market manipulation or irregularities.
Furthermore, there is growing institutional support for the cryptocurrency industry; as slow as it may be right now. There are increasing numbers of solutions designed to help both large institutional investors, and regular retail investors safely wade into crypto-assets.
We have also seen more hype surrounding Bitcoin futures markets, as investors find more ways to expand and hedge their investments. Bakkt's physically-settled Bitcoin futures contracts had recently recorded an all time high of +796% surge in daily volume, despite its slow start.
Moreover, there is also expanding supply and demand for solutions such as asset custody, and insurance. With these tools; investors feel more secure to invest in an otherwise nascent market. With more adoption and acceptance, it leads to market maturity and robustness, which eventually leads to regulation.
Conclusively, as with my previous #Newsreel post, I do think that regulations will help to make cryptocurrencies more accessible to the general public. Certainly, it will not be an easy path forward, and it may take some time to realise.
Nevertheless, for all its troubles, it's damn well worth it.
Images courtesy of Shutterstock.
Update:
As was recently reported by Coindesk and CoinTelegraph; Wilshire Phoenix had updated their Bitcoin ETF filing with the SEC. The amended applications was filed with the SEC on October 4th, which replaces their original filing completely.
There are 2 main differences with the updated filing:
Coinbase's involvement with the ETF is further clarified. Coinbase Custody will provide custodian solutions under cold wallets; and will verify the availability of assets under the ETF within 5 days before its monthly rebalancing.
The ETF's NAV (net asset value) will be calculated using CME's CF BRR (Bitcoin Reference Rate. While the CF BRR is usually used for Bitcoin futures, Wilshire Phoenix noted that referencing the BRR would help in preventing price manipulation.
This updates comes about as the SEC had denied Bitwise's ETF application. It's worth noting that Wilshire Phoenix's ETF will be different, as it hedges Bitcoin's volatility with short-term Treasury bills (T-bills).
As of right now, the SEC is open to public comments regarding the new application. As crypto enthusiasts; we can only wait and see what the SEC will decide next.
What do you think? Will the SEC finally approve the first Bitcoin ETF?