Bitcoin ETFs are now dead in the water for the foreseeable future
Don't hold your breath for a Bitcoin ETF unless you can hold your breath for several years.
Bitcoin ETFs in short
Bitcoin exchange traded funds (ETFs) are a type of financial product that tracks the price of Bitcoin.
The main thing that would make an ETF different from other existing and loosely-regulated Bitcoin price-linked products is that an ETF would be traded on major non-cryptocurrency markets like stock exchanges. As the theory goes, this would help normalise Bitcoin, driving up its prices.
The reason there are not yet any Bitcoin ETFs is that the companies proposing them have not managed to obtain regulatory approval for them from the SEC.
The SEC's primary concern across the board is that Bitcoin prices could be manipulated, which could in turn lead to ETF prices being manipulated, which is just not cool on regulated markets.
In its ETF application, Bitwise raised both hackles and eyebrows with its claim that the Bitcoin markets consist of 95% fake volume, but that it would base its prices on the 5% of real volume on 10 exchanges believed to be reputable.
And in its ETF rejection, the SEC has made it clear where exactly the cryptocurrency markets need to go before ETFs can be approved.
A regulated market of significant size
"If the listing exchange for an ETP fails to establish that the underlying commodity market is inherently resistant to fraud and manipulation, or that other means to prevent fraudulent and manipulative acts and practices will be sufficient... the listing exchange must enter into a surveillance-sharing agreement with a regulated market of significant size relating to the underlying or reference assets," the SEC wrote.
So, unless someone has some really good arguments for why Bitcoin is resistant to manipulation (Bitwise's argument here was basically "the markets are 95% fake, but we know which 5% is real"), the only way forward for a Bitcoin ETF may be for listing exchanges to enter "a surveillance-sharing agreement with a regulated market of significant size relating to the underlying or reference asset".
The SEC goes on to define "significant size" as "a market (or group of markets) as to which:
- There is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, so that a surveillance sharing agreement would assist in detecting and deterring misconduct
- It is unlikely that trading in the ETP would be the predominant influence on prices in that market."
The SEC lays into Bitwise's argument and methodology pretty hard, but essentially says that even if you accept the premise – focus on the 5% of real Bitcoin trading volume across 10 legitimate exchanges – you're still left with a lot of pretty sketchy-looking folks by the regulated securities market standards.
"Significantly, Binance, based in Malta and the single largest Bitcoin trading platform among the platforms the Sponsor [Bitwise] identifies as "real" — representing 39% of the purportedly "real" Bitcoin volume — has not registered with either FinCEN or the NYSDFS; four of the ten platforms the Sponsor utilizes — representing 69% of the purportedly "real" bitcoin volume — do not have a BitLicense from the NYSDFS; and half of the bitcoin platforms the Sponsor utilizes lack internal or third-party market surveillance tools," the SEC observed.
And quoting commenters, the SEC also noted that Binance has a "colourful past", Bitfinex has a colourful present ("just too painful to even write about at this time") and Kraken has colourful language that "should be of concern".
These characters are also among the cryptocurrency exchanges that NYSE Arca – the exchange that's proposing to list the Bitwise ETF – would have to enter into surveillance agreements with for a Bitcoin ETF to get through.
But "NYSE Arca has not stated that it has entered or will enter into surveillance-sharing agreements with those "real" spot platforms that utilise surveillance tools. Moreover, even if NYSE Arca did enter into such agreements, it is not clear what ability NYSE Arca would have to compel the sharing of surveillance data," the SEC says.
Basically, there's no chance of a Bitcoin ETF until the whole cryptocurrency world evolves in a way it's not necessarily comfortable with, and until major cryptocurrency exchanges are nestled firmly under the thumbs of the appropriate US authorities in a way that forces them to share market surveillance data.
Despite the rapid regulatory maturation of the crypto world, that's still a long way off.
"If the filing is rejected next week, we'll consider the feedback the SEC shares on the concerns they're still working through and get to work on addressing them," said Bitwise CEO Hunter Horsely ahead of today's news.
If that still holds true, Bitwise sure has its work cut out for it.
On a more upbeat note, it's still a tangible target. It just means there are still many years rather than months to go on the road to Bitcoin mass adoption – if you subscribe to the theory that Bitcoin and Bitcoin ETFs are the key to everything.
Disclosure: The author holds BNB, BTC at the time of writing.
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