In August, the Securities and Exchange Commission (SEC) rejected nine separate applications to list Bitcoin exchange-traded funds (ETFs).
Proposals by ETF sponsors including Direxion, ProShare and GranitShares, to list the first US-based cryptocurrency ETFs were denied by the SEC. Each rejection order contained the following language as part of its reasoning:
“…the 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.”
The SEC goes on to suggest that the proposed ETFs “…offered no record evidence to demonstrate that bitcoin futures markets are ‘markets of significant size,’” which would justify or demand enhanced surveillance and fraud prevention strategies.
Thematically, the SEC pointed to the difficulty of enforcing market manipulation surveillance and prevention in a Bitcoin ETF. In addition, from the SEC’s point of view, the applications failed to prove the Bitcoin futures markets are large enough to support or establish a means to prevent fraudulent and manipulative acts. The SEC did indicate, however, the denial of the applications does not rest on an evaluation of whether Bitcoin has value as an investment.
Based on these denials by the SEC, until a sponsor can adequately demonstrate that Bitcoin ETFs are “markets of significant size” or provide alternative methods to protect the markets from fraudulent activities, US-based ETFs may still be in the distance. However, with an increasing appetite among traditional Wall Street banks to enter the cryptocurrency market and offer cryptocurrency products and opportunities to their clients, the time horizon to US-based ETFs and other trading products may be shortened. While many in the cryptocurrency markets may reject the presence of large, traditional banking institutions entering the market, such institutions may be able to convince the SEC that various cryptocurrency products and trading opportunities can be launched in compliance with existing regulations.
Jennifer Post is a Corporate and Securities partner with Thompson Coburn LLP. She serves as primary outside counsel to a variety of individuals, institutions and companies.
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