Examining SEC’s Decision to Reject Bitcoin ETF

On Friday, Bitcoin.com reported on the ruling by the U.S. Securities and Exchange Commission (SEC) rejecting Bats BZX Exchange’s proposed rule change to list and trade Coin ETF. In this article, we examine the reasoning behind the SEC’s decision and the Bitcoin community’s reactions.

Also read: SEC Rejects Rule Change for Bitcoin ETF

Reasons for SEC’s Rejection

The SEC explained how the proposed rule change was disapproved because the proposal was not consistent with “Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest”.

In order to be consistent with the Exchange Act, the SEC explained that:

Bats BZX Exchange must “have surveillance-sharing agreements with significant markets for trading” bitcoin or its derivatives. Bitcoin markets must be regulated.

However, Friday’s Order states that:

The Commission believes that the significant markets for bitcoin are unregulated.

Since bitcoin markets are largely unregulated, the SEC concludes that Bats BZX Exchange does not have and would not be able to have the type of surveillance-sharing agreement which all other SEC-approved commodity-trust ETPs (exchange-traded-products) have.

The Commission claims that these agreements help address “concerns about the potential for fraudulent or manipulative acts and practices in this market”. Without them, the proposal would not be consistent with Section 6(b)(5) of the Exchange Act.

‘Inconsequential’ Comment Letters

According to the Commission, 59 comment letters were received on this proposed rule change as of March 8. The 38-page Order dedicates 15 pages to discussions of comments received by the SEC, grouped into comments regarding; the worldwide market for bitcoin, the Gemini exchange, and the derivatives markets for bitcoin.

One commenter, Mark T. Williams, otherwise known as “Professor Bitcorn” in the Bitcoin community, is a member of the Boston University faculty specializing in banking, capital markets and commodity trading risk. The professor is infamous for publicly predicting in late 2013 that Bitcoin will fail and crash to below $10 by June 2014. He has since doubled-down on his claim and stands by his opinion today that the Bitcoin ‘bubble’ will indeed deflate eventually, and insists that he will be vindicated.

For some reason, the Commission cited Williams eight times in its ruling, so his comments stood out among others. He told the SEC that “There are several fundamental flaws that make Bitcoin a dangerous asset class to force into an ETF structure”. He also tried to convince the Commission to disapprove the ETF, citing the problems of “shallow trade volume, extreme hoarding, low liquidity, hyper price volatility, a global web of unregulated bucket shop exchanges, high bankruptcy risk and oversized exposure to trading in countries where there is no regulatory oversight, such as China”.

However, the Commission wrote that: “Ultimately, however, comments on these topics do not bear on the basis for the Commission’s decision to disapprove the proposal”.

Reactions from the Community

The Bitcoin community went wild on social media after the decision. The stated reasons for disapproving the proposed rule change for Coin ETF did not resonate well with the community. Not all were disappointed by the outcome, however.

Famous speaker Andreas Antonopoulos tweeted: “The ETF was denied because bitcoin can’t be regulated, can’t be surveilled. Feature, not bug”. Another of his tweets says:

Bitgo CTO Ben Davenport also took to Twitter with his interpretation of the event. “SEC: bitcoin must be traded on regulated markets to be traded on regulated markets”, he tweeted.

Senior Advisor at MIT Media Lab, Michael Casey, tweeted: “SEC rejection of #Bitcoin ETF means the space remains interesting. For now, BTC stays in the zone of disobedience. Where innovation happens”.

There is Still Hope for Future Bitcoin ETFs

While the SEC rejected the proposed rule change for Coin ETF, it is not all hopeless for other Bitcoin ETFs. The Commission wrote:

Bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop. Should such markets develop, the Commission could consider whether a Bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act.

The next Bitcoin ETF up for consideration by the Commission is Solidx Bitcoin Trust whose deadline is March 30. The third one in line is Barry Silbert’s Bitcoin Investment Trust whose deadline is sometime in October.

What do you think of the SEC’s reasons for disapproving the proposed rule change for Coin ETF? Let us know in the comments section below.

Images courtesy of Shutterstock, Wikipedia, Twitter, Bats Global Market, SEC

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