The Securities and Exchange Commission rejecting proposals for bitcoin exchange traded funds is officially the crypto community’s 'dog bites man’ news story.
In the 18 months since the initial strikedown of the Winklevoss bitcoin ETF proposal in March 2017, the agency’s approach to the controversial retail investment vehicles has become literally boilerplate.
Indeed, another cohort of nine ETF proposals was roundly rejected on Wednesday, with the agency employing the same reasoning and language across all of the rejections.
Perhaps the only aspect more remarkable than the shutout itself was the degree to which hardly anybody in crypto actually expected them to be approved in the first place.
“It was largely apparent going into this that few people really expected these proposals to go through anyway,” noted Mati Greenspan, senior market analyst at eToro, pointing out that crypto markets had largely factored the assumed rejections into the price of bitcoin.
What’s the Mystery?
The main rationale offered by the SEC for the latest rejections, as well as earlier ones, is that bitcoin markets still remain overly un-policed and prone to manipulation, thereby rendering the popular cryptocurrency too risky for retail investors to be overly exposed to.
“The SEC is basically saying "not on our turf,” said James Angel, a finance professor at Georgetown University, adding:
“Their rationale is that the exchanges have to show that the underlying market for bitcoin is not subject to fraud and manipulation, and the exchanges have not met their burden of proof. Given the history of fraud, hacks, and manipulation in the bitcoin market, it makes sense.”
Angel also implied that the SEC is seeking to assert its muscle in an area where it reckons other financial regulators have perhaps been too lenient.
“It's also a slap in the face of the CFTC, CME, and CBOE for allowing bitcoin futures, as the SEC is implying that those futures exchanges are too vulnerable to fraud and manipulation," he explained.
Asaf Meir, founder and CEO of Solidus Labs, a startup building solutions to provide market surveillance for crypto-native asset trading, concurred, arguing that the complexity of assets like bitcoin creates sizable opportunities for savvy and malicious actors to manipulate markets.
“The SEC’s decisions over the past few weeks reflect that concern and correspond with more and more reports on the enormous volume of manipulation in cryptoasset trading,” he said, noting that the agency is “repeatedly citing the lack of sufficient trade surveillance for these assets.”
Perhaps what’s most perplexing is the persistence that the bitcoin ETF proposers have demonstrated in seeking approvals despite no significant shift in the soundness of these underlying markets.
“In the next few weeks all of the entities behind various ETF's will re-submit the same ETF again with zero changes: 'It will be different this time,'” the controversial crypto pundit Bitfinex’ed quipped on Twitter.
Broader Concerns
Huhnsik Chung, a partner at Stroock & Stroock & Lavan in New York, reckoned that there are farther reaching regulatory questions within the U.S. crypto space that must be answered before bitcoin-based ETF products pass muster.
“(The SEC’s) rejection is likely due in part to the confluence of all of the issues globally that have limited the growth of the digital asset segment, and particularly as to the size and volatility of the bitcoin market,” Chung explained, arguing that the lack of clarity between security and utility token offerings, the convoluted tax treatment and lack of harmony in the regulations that govern bitcoin and other digital assets are hindering growth of initial coin offering markets, and thereby throttling bitcoin markets.
Chung added:
“Unless these issues are addressed, digital asset businesses will continue to go offshore looking for a better regulatory environment and legal certainty for this asset class.”
Where to Now?
Nevertheless, many bitcoin enthusiasts see the ETF rejections as a plug in an unsteady dyke when it comes to institutional players entering the market.
“I don't think (the rejections) are that important. The ‘physical’ over-the-counter/institutional bitcoin infrastructure is only getting started,” said Jonathan Hamel of Acadamie Bitcoin in Montreal. “The development of financial vehicles backed by bitcoin is inevitable. It's not if, it's when.”
Meir, a Goldman Sachs alum who founded Solidus Labs along with several former Goldman fintech engineers, argued that crypto markets need to do a better job of self-policing and self-regulating to combat nefarious activity before an ETF can be green-lighted:
“There are familiar forms of manipulation and fraud like pump and dump and wash sales, but the cryptoasset industry also needs to be mindful of new potential crypto-specific forms of manipulation, and how we can address them looking forward.”
