This may last another couple of years, but the history of Bitcoin exchange funds (ETF) and the US Securities and Exchange Commission (SEC) is already long. Back in March, 2017, the SEC rejected a bid for Bitcoin-ETF, put forward by the Winklevoss twins, stating that the underlying Bitcoin market is still too manipulative, unstable and resistant to surveillance. Fast forward to March 2019 of the year, and the SEC has not yet approved a single Bitcoin-ETF, while comments on its latest public consultations remain mostly negative.
Such a lack of significant progress may seem deadly discouraging for casual observers, hoping that the ETF will provide cryptography with additional legitimacy. However, the past period from March 2017 of the year to the present has witnessed a softening of the SEC position, with the members of the commission even saying that they expect the Bitcoin ETF to be approved sooner or later. Thus, there are many reasons to hope for recent SEC transactions with Bitcoin ETF applicants, even if the long-term history shows that the commission has not always maintained a favorable position regarding crypto.
2017: SEC claims controllability, volatility and lack of oversight.
30 June 2016, the Bats BZX exchange filed with the SEC a proposed rule change that would allow it to place and trade Winklevoss Bitcoin trust shares. If approved, ETF Winklevoss would be the first Bitcoin exchange fund licensed to place on a fully regulated stock exchange, which would allow a non-professional to access Bitcoin without having to own a cryptocurrency or counter cryptocurrency. exchange or wallets.
Without a doubt, this would be a big step towards the main direction of cryptographic protection, but after a long period of discussion and consultation, the SEC rejected the proposed rule change. 10 March 2017, he published a statement explaining the reasons for which his decision was made, while difficulties in preventing manipulation and fraud ranked first on his list.
[ads_color_box color_background=”#eee” color_text=”#444″]“Based on the information it has, the Commission believes that significant markets for bitcoin are not regulated. Therefore, since the exchange has not yet entered into and currently will not be able to enter into an oversight sharing agreement that was entered into in place in relation to all previously approved Commodity Trust ETP agreements, which help address concerns about the possibility of fraudulent or manipulative actions and practices on this market – The Commission does not consider that the proposed rule change is consistent with the Exchange Law.”[/ads_color_box]
Just two weeks after this decision was published, the SEC rejected a similar offer submitted by NYSE Arca, which is owned by the Intercontinental Exchange and which wanted to list ETX SolidX Bitcoin Trust. Reusing many of the same phrases and statements, the commission wrote on March 28 that "it does not consider this proposal to be consistent with section 6(b)(5) of the Exchange Act, which requires, among other things, that national securities exchange rules designed to prevent fraudulent and manipulative actions and practices.”
As the two episodes above show, 2017 was not a particularly good year for bitcoin ETFs, or for the SEC to be tempted to license one of them – because aside from SolidX and Winklevoss, Barry Silbert’s Grayscale Investments ETF was registered with the SEC in January 2017 and it's no better than its competitors. He was detained on March 22 after he received three comments - all negative - from members of the public, and then in September of that year, he withdrew his statement, citing the lack of "regulatory changes" in the crypto market as the main reason for this action.
From March to September, the public sent additional comments to the SEC during the consultation, and although there were only 21 in the end, some of them give an idea of why Grayscale Investments is unlikely to receive approval for its ETF at that time.
For example, a seven-page letter from Mark T. Williams, a professor of finance at Boston University, provides a long list of reasons why a Bitcoin ETF, especially from Grayscale Investments, is not a good fit. These include disadvantages of the Bitcoin market such as “poor price discovery, irregular trade execution, low trading volume, hoarding, relatively low liquidity, hyperprice volatility, global network of unregulated exchange transactions, high risk of bankruptcy, and excessive exposure to trade and price discovery in countries beyond outside the jurisdiction of the SEC. However, Williams also noted that the Digital Currency Group — which owns Grayscale Investments and Coindesk (among other businesses) — is “fraught with conflicts of interest.”
But while this suggests that there is some strong opposition to this particular ETF, other researchers outside of the cryptocurrency industry have been more positive. “Moving bitcoin trading activity to regulated U.S. exchanges will improve price discovery and reduce the chances of manipulation and money laundering,” said James J. Angel, associate professor of finance at Georgetown University.
Similarly, Professor Campbell R. Harvey of Duke University (and colleagues) wrote that “allowing a Bitcoin investment trust to list its shares on the NYSE Arca as a bona fide exchange-traded product (“ETP”) would demonstrate the Commission’s utmost commitment to achieving “its investor protection goals, maintaining efficient markets and facilitating capital formation. Considering that six other economists from six other American universities signed this statement, it showed that there was in fact significant support for the Bitcoin ETF idea, even if the SEC cannot be disavowed by its view that the cryptocurrency market is still too anarchic for to approve such a fund.
2018: growing support from wider industry
When 2017 year came to an end, there was a very real feeling that the SEC was looking at the Bitcoin market with suspicion and that its skepticism about the market was reinforced by a significant number of comments that it received from people outside the crypto industry. the unfavorable situation began to change gradually over the course of 2018, because, even though the SEC continued to reject Bitcoin ETFs, dissenting voices began to appear on the commission.
This was most evident in July, when the SEC rejected for the second time Winklevoss Bitcoin Trust's offer to list the Bats BZX Exchange. Once again, he decided that Bats' proposal did not demonstrate that it complied with rules "designed to prevent fraudulent and manipulative acts and practices." However, he took the unusual step of adding a disclaimer to this disclaimer, writing: “While the Commission does not approve of this proposed rule change, the Commission emphasizes that its disapproval is not based on an assessment of whether the technology is Bitcoin or blockchain more generally. sense, has utility or value as an innovation or investment.”
More importantly, Hester Pierce (now called “Bitcoin-Mom”) did not agree with this decision, despite the fact that she was a commissioner at the SEC. 27 July she wrote:
[ads_color_box color_background=”#eee” color_text=”#444″]“The order of rejection focuses on the characteristics of the spot market for bitcoin, and not on the ability of BZX – in accordance with its own rules – to monitor trading and prevent manipulation of ETP shares, listed and traded on BZX.”[/ads_color_box]
This overt dissent from the SEC Commissioner indicated a slight change in favor of Bitcoin-ETF. And although one of the comments presented during the SEC brief consultations in May was extremely hostile towards the ETF Winklevoss, most of them supported it. More importantly, supporting letters and comments did not always come from people working directly in the cryptoindustry: four companies operating in the global market for exchange-traded products provided key evidence in support.
For example, C&C Trading concluded in a comment that it “supports the inclusion of ETFs in COIN and believes it will be an innovative product for investors and market professionals to trade,” and the ETF marketer also added that many existing ETFs are based on on opaque and illiquid underlying instruments.”
However, despite the fact that the industry at large and public opinion at large have embraced the idea of Bitcoin ETFs, it is not surprising that 2018 set a record for the number of proposals rejected by the SEC. On August 22 alone, the commission rejected nine applications, with the likes of Direxion, ProShares and GraniteShares rejecting theirs (and in some cases more than one). And once again, the SEC explained these rejections primarily in terms of the inability to prove that applicants' rules were "designed to prevent fraudulent and manipulative actions and practices."
The fact that the commission remained unchanged from this point of view should not be surprising, not least because this decision was followed soon after the publication of a rather terrible study of the manipulation of the cryptocurrency market. In June, researchers at the University of Texas published a document stating that manipulations with Tether and Bitfinex caused about 50 percent of the rise in Bitcoin prices in 2017. Just a month before, the US Department of Justice launched a criminal investigation into the manipulation of bitcoin prices, while in early August the Wall Street Journal published a study that revealed that price manipulations were mainly carried out by “trade groups” using Telegram and other messaging service.
2019: Rising Hope, Despite Decline In Momentum
In light of all this negative publicity, it is not surprising that the SEC continues to deny approval for Bitcoin-ETF. Although nothing has changed significantly in 2019 (and the ETF has not yet approved it), the reason for hope has increased again.
In February, SEC commissioner Robert Jackson Jr. went on record saying that he expects the commission to license the bitcoin ETF sooner or later.
[ads_color_box color_background=”#eee” color_text=”#444″]“After all, I think someone will meet the standards we laid out there? I hope so, and I think so.[/ads_color_box]
In the same month, the Commissioner for Commodities and Futures Trading (CFTC) criticized the SEC for rejecting previous ETFs because of possible price manipulation. Speaking at the Bi-Partisan Political Center in Washington, DC, Brian Quintenz said:
[ads_color_box color_background=”#eee” color_text=”#444″]“There are mathematical ways through the calculated index to develop a contract where even if there is not much liquidity on the one exchange referenced, the index itself cannot be manipulated” .[/ads_color_box]
In addition to Hester Pierce’s continuing support for the crypto industry, such observations point to a climate in which the SEC is gradually becoming more susceptible to the Bitcoin-ETF idea, despite Pierce’s December 2018 warning that approval may take longer than some people hope
Indeed, the approval may take some time, since the predictions for the ETFs considered do not look particularly encouraging. In February, Reality Shares abandoned their own trust ETF after the SEC pushed him to this, mainly because the ETF took the unusual step of combining bitcoin futures, sovereign debt instruments and money market mutual funds into a single derivative instrument. And while there was some hope of reapplying the Chicago Stock Exchange (CBOE) for Bitcoin-ETF, this was mitigated to a large extent by the public’s negative reaction to the bid.
Of the 18 comments submitted to date (between February 13 and March 31), only three were in favor of the ETF. Nevertheless, it would be extremely imprudent to conclude, on the basis of 15, disapproving comments that the general public or the financial industry are becoming increasingly tired of the idea of creating a bitcoin ETF. This is due to the fact that some of these comments lack real credibility, or they are at best extremely minimal (for example, here, here and here), or completely inconsistent at worst (for example, here, here and here). As for the other, although they tend to defend their positions with greater depth and rigor, they are all against repeated commentators.
For example, two contributions from one “Sam Ahn” are his eighth and ninth, while “investment specialist” Jonathan Harris sent at least two very similar emails with a general bitcoin skepticism, as well as one email from April 2017.
This emergence of entrenched critics undermines any suspicion that Bitcoin-ETF opposition may somehow be growing. However, almost the same, it is discouraging to note that there is actually no significant contribution to advice on the latest application of CBOE. While it's hard to do anything on the basis of a single proposal, this may indicate that the ETF push is losing some momentum - or at least publicity. At the very least, the interest of the general public and industries outside of cryptocurrencies may be waning, even though the crypto industry is firmly behind the idea.
And even if the interest is declining, it is probably due to the recognition that now it is not the SEC's letters from the public that will affect the SEC, but the actual evolution in the formation and regulation of the cryptocurrency industry. And with so many things happening on this front – from the US to Russia to Japan – it’s probably only a matter of time before the SEC approves its first bitcoin ETF.