On 22 August 2018, the U.S. Securities and Exchange Commission (SEC) rejected nine Bitcoin ETF proposals: two from ProShares, five from Direxion, and two from GraniteShares. All nine of these Bitcoin ETFs were based on Bitcoin futures rather than backed by “physical” Bitcoin (as is the case with the proposed VanEck/SolidX Bitcoin ETF).

The Commission used the same language in all three disapproval orders:

“This order disapproves the proposed rule change. 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.”

“… 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.”

“Among other things, the Exchange has offered no record evidence to demonstrate that bitcoin futures markets are 'markets of significant size.' 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.”

Here are some of the reactions from the crypto community on Twitter:

The SEC has rejected *all* of the pending derivative-backed bitcoin ETF proposals from ProShares, GraniteShares, and Direxion. I expected the ProShares rejection this week, but final decisions on GraniteShares and Direxion weren't due until September 15 and 21 respectively. Wow. — Jake Chervinsky (@jchervinsky) August 22, 2018

Depending on the reasoning, I figured a rejection of ProShares would signal the very likely rejection of GraniteShares and Direxion next month. I didn't think the SEC would kill 'em all in one fell swoop. Makes good sense though, as I'm reading through the orders now. — Jake Chervinsky (@jchervinsky) August 22, 2018

The Bitcoin ETF is unlikely to get approved before there is a qualified custodian. Stop worrying. The market infrastructure isn’t ready yet. — Pomp 🌪 (@APompliano) August 22, 2018

I mean yawn fest

Who cares

2015 called and they want their headline back By the time these dinosaurs give their stamp of approval no one will need an ETF (exchanges have 30 million customers so need is limited already) — Bruce Fenton (@brucefenton) August 22, 2018

“SEC denies Bitcoin ETF” is the “China bans Bitcoin” of 2018. — Riccardo Spagni (@fluffypony) August 22, 2018

While most are distracted by ETF's, @Bakkt bringing Bitcoin to your 401k could end up being the big story this year. — Shmitty (@cryptoshmitty) August 22, 2018

Nine (How Ironic 😁) #Bitcoin #ETF's regected by @SEC_Enforcement. TRADING RULE: News Does Not Change Trend & this @SEC_News was EXPECTED. The $BTCUSD #shortsqueeze is on. Still looking for a short term Dead Cat Bounce to $7-7.5k them down to $5k. https://t.co/OqUFAarLSm — Tone Vays [@Bitcoin] (@ToneVays) August 23, 2018

American lawyer Jake Chervinsky provided the following analysis of the SEC’s decision:

4/ The SEC relied heavily on last month's denial of the Winklevoss ETF appeal, which found that: – bitcoin markets are not inherently resistant to manipulation

– to deter manipulation, exchanges need a surveillance-sharing agreement with a regulated market of significant size — Jake Chervinsky (@jchervinsky) August 23, 2018

5/ ProShares & the other ETFs tried to solve this problem by pricing bitcoin through the well-respected, regulated CBOE & CME futures markets. In theory, this gave derivative-backed ETFs a better chance of approval than commodity-backed ETFs, which use unregulated spot markets. — Jake Chervinsky (@jchervinsky) August 23, 2018

6/ The SEC wasn't impressed, finding that the bitcoin futures markets aren't “of significant size” as required by the Winklevoss denial. They even cited #cryptotwitter favorite Chris Giancarlo, CFTC Chairman, who characterized the volume of the futures markets as “quite small.” — Jake Chervinsky (@jchervinsky) August 23, 2018

7/ As a result, the SEC found that CBOE & CME wouldn't provide enough info about the “identity of market participants” on unregulated spot and derivative markets “where a substantial majority of trading” occurs. They didn't actually cite BitMEX or Bitfinex, but . . . you know. — Jake Chervinsky (@jchervinsky) August 23, 2018

8/ They also repeated the concern that most trading “occurs on unregulated venues overseas that are relatively new and that generally appear to trade only digital assets.” This makes me wonder if they'll approve *any* ETF before spot markets are regulated, which may be a while. — Jake Chervinsky (@jchervinsky) August 23, 2018

9/ Long story short, this isn't a great sign for the bitcoin ETF bulls. The SEC's demand is clear. They want to see: (i) a surveillance-sharing agreement . . .

(ii) with a regulated market . . .

(iii) of significant size. That seems like a tough request to satisfy in 2018. — Jake Chervinsky (@jchervinsky) August 23, 2018

10/ On the other hand, today's decision gives valuable guidance to the folks at VanEck & SolidX. I'm excited to see what @gaborgurbacs & co. come up with. The only ETF deadline left, and the only one most of us cared about in the first place: VanEck/SolidX on September 30. — Jake Chervinsky (@jchervinsky) August 23, 2018

Gabor Gurbacs, the director of Digit Assets Strategy at at VanEck/MVIS, agreed with Chervinsky’s excellent analysis, but also strongly criticized the SEC’s decision:

1. @jchervinsky — excellent thread; thank you! I think your observations are spot on. I’d add one observation: By not approving ETFs the SEC creates a favorable environment for unregulated spot platforms, scammers and fraudsters. In that, they fail their job to protect investors. — Gabor Gurbacs (@gaborgurbacs) August 23, 2018

2. I do think that many of the SEC’s questions about market structure (pricing, futures volume, etc…) have been answered.See Vaneck letter to IM.I don’t know why Bitcoin needs to meet a 5x higher regulatory burden than other products. Not good for innovation. CC: @HesterPeirce — Gabor Gurbacs (@gaborgurbacs) August 23, 2018

At press time (approximately, 23:28 UTC on 22 August 2018), according to data from CryptoCompare, BTC is trading at $6,365, down 1.61% in the past 24-hour period. Below is the one-day price chart for Bitcoin:

The fact that the crypto market has reacted with a yawn to today’s disappointing but unsurprising news from the SEC is a testimony to Bitcoin’s resilence, and it could be a sign that that Bitcoin has reached a bottom around the $6300-6400 support level.

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