It's been a very interesting couple of days that clash somewhat with the otherwise demoralizing couple of months. The last few days have seen a number of Bitcoin Exchange Traded Funds (ETFs) that were otherwise banking on a quick green light for their proposals by the Securities and Exchange Commission.
On August 22nd, the SEC made public its verdict on . the proposals of nine separate Bitcoin-based Exchange Traded Funds, these being nine separate ones submitted by ProShares, Direxion, and GraniteShares.
The final decision by the SEC was to deny the trio any form of permission to go ahead with their planned products respectively. ProShares was looking forward to the launch of their Bitcoin ETFs, while Direxion was aiming at obtaining approval for its five products, while GraniteShares had hoped to launch two of their own offerings.
The SEC, however, had a mind of its own on the various proposals, making a U-turn on its original findings on August 23rd, and put out a statement that it would review its decision of each of the nine ETFs previously assessed.
While the regulatory body had yet to provide an accompanying deadline for its review, which might mean that these applicants might still be able to push forward with their initial plans for their products.
The Fears – Fraudulent Behaviour and Price Manipulation
The SEC, upon providing their decision of each of the various products proposed, they each were rejected upon pretty much the same grounds of concern. The main ones being that the companies were, as of yet, not meeting anything near the stringent requirements necessary in order to “prevent fraudulent and manipulative acts and practices.”
Along with this, the regulatory body raised some concerns about the size of the Bitcoin ETF marketplace. It must be considered that it is a very small domain compared to the market as a whole. There is, however, a relative unease over the exchanges, and that they won't be able to ensure that there is no market manipulation.
“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 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.”
Another important factor that should be noted is that the SEC has previously made it clear that its original decision on other ETFs was, in no way, influenced by, or a reflection on, the value and use cases of Bitcoin and the blockchain technology behind it.
“[The agency] 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.”
Though It's Not all Doom and Gloom
Opinion is rife on the subject of the SEC's rejection. The founder and partner at Morgan Creek Digital Assets, Anthony Pompliano addressed the topic during his weekly newsletter, Off The Chain.
Within the newsletter, Pompliano illustrated that there were a number of important takeaways from the SEC's judgment that should be heeded. This seems to be a fair statement, while also maintaining their focus on ensuring the safety of investors.
When it comes to the respective ETFs in particular, they differ somewhat from the previous offerings that were also subject to rejection by the SEC. Each of the nine recently proposed were, unlike the others, ‘derivative-backed', which means that the exchanges own futures contracts, not actual Bitcoin.
And while the SEC will go into a state of review regarding this latest string of rejections, Pompliano believes that the cryptocurrency industry will most likely see the launch of Bitcoin ETFs, not in 2018, but early 2019 due to this news.
“The crypto industry will eventually get retail products approved by the SEC. The proper infrastructure and controls need to be in place first. This work will include implementing qualified custodianship while preventing market manipulation. It is unlikely that regulators will be satisfied with any anti-market manipulation measures created during the remainder of this year. This would push the first ETF approval until 2019.”
Much as Pompliano goes on to suggest, there is an infatuation with Bitcoin ETFs and the prospect of their issuance bringing better market sentiment for the cryptocurrency world. On the other hand, these financial instruments could also have a negative effect on the overall stability of the value of Bitcoin, Pompliano has noted:
“In fact, an argument could be made that an ETF would simply give more people the opportunity to short Bitcoin, which would drive the price lower. Although this would be highly unlikely, we did see a significant increase in downward price pressures in the market with the introduction of Bitcoin futures roughly nine months ago. We’re living in an unpredictable market, so anything is possible.”
There were a number of positive points in the aftermath of the SEC's decision on the ETFs. One of those opinions being Emin Gün Sirer, the associate professor of Cornell University.
“The reasoning by the SEC is absolutely fair. The good news is that they are not saying anything negative about crypto as an asset class. In fact, they seem predisposed to accept it in the same category as every other asset, and they are applying the exact same standards as everything else. The problems they cite are not with the asset, but with the ecosystem that has been built around it.”
Gün Sirer is under the impression that the primary stumbling block lies in front of cryptocurrency exchanges, which are still afflicted by the problems like fraud and a lack of regulatory frameworks:
“The crypto community keeps hoping for a miracle, where the SEC suddenly has a lapse in judgment and reverses decades of its own practice, and keeps getting disappointed as a result. The SEC is patiently citing a small number of issues, all related to malfeasance or misbehavior at the exchanges. The crypto community has to learn to demand better, and evolve the ecosystem toward a higher standard.”
Until this becomes the state of affairs for cryptocurrencies, the University professor believes that the SEC will continue to deny the approval of any ETFs put forward to it.
Brian Kelly, a highly experienced Crypto analyst also reacted to the news positively in a segment on the CNBC Fast Money show, he suggested that the latest move points to a gradual approval of Bitcoin ETFs, likely within February 2019. When it comes to the barriers to entry, in his view, is the SECs ability to keep a close watch on any crypto trading, including identifying identity fraud and manipulation.
Along with this, Kelly mentions that the SEC believes that the Bitcoin futures markets are not yet mature in comparison to other markets, having only been around since December 2017.
“I think we’re incrementally closer to getting an ETF and a very positive thing was that Bitcoin didn’t sell-off. When a market, whether its Bitcoin or oil, doesn’t sell-off on the news that it should, that means there’s a sentiment change.”
Riding the Waves of Change
At the moment, it remains unclear when the SEC will be releasing its findings on the review regarding its decision on the latest ETFs, there is a lot for cryptocurrencies to look forward to in September.
The Securities and Exchange Commission will deliver its ruling on Direxion's proposed ETF on September 21st, while the underlying deadline for the other Bitcoin ETF which was proposed by the financial services company, SolidX and investment organization VanEck has been pushed back to September 30th.
It would seem that the SEC is attempting to give itself as much time as possible to make a number of well-educated decisions when it comes to the matter of new exchange-traded related products. This stance follows their other announcement. in July, which involved the rejection of the Winklevoss Twins' second application to launch its own Bitcoin ETF.
The ruling had a big effect on the cryptocurrency markets, as values dropped across the board following the decision.
One of the staunch proponents pushing for the approval of Bitcoin Backed ETFs was also none other than the SEC commissioner, Hester Peirce, who publically dissented to the ruling back in July when the Winklevoss' Bitcoin proposal was rejected for the second time.
Within the statement she provided, Peirce stated that the very establishment of a Bitcoin-related Exchange Traded Products (ETPs) would allow both institutional and mainstream investors to gain more exposure to the cryptocurrency market in a regulated environment with more measures in place to have it securely traded.
“An ETP based on Bitcoin would offer investors indirect exposure to Bitcoin through a product that trades on a regulated securities market and in a manner that eliminates some of the frictions and worries of buying and holding Bitcoin directly. If we were to approve the ETP at issue here, investors could choose whether to buy it or avoid it.”
The SEC Wants to Get it Right
At the moment, it seems like the SEC is taking a relatively hard stance against cryptocurrency exchanges that are trying to launch Bitcoin ETFs. While this appears to be the case, it's important to take a step back, while looking at the overarching message that the SEC is attempting to send out when it comes to this topic.
Its latest decision in wishing to review the findings of its own staff charged with the research for these proposals shows that the organization is performing something akin to a balancing act.
It was previously stated by the SEC Chairman, Jay Clayton in his speech in February, that the organization seeks to create an environment that broadly encourages growth in the market, while also protecting investors from issues such as fraudulent practices and scams.
“Simply said, we should embrace the pursuit of technological advancement, as well as new and innovative techniques for capital raising, but not at the expense of the principles undermining our well-founded and proven approach to protecting investors and markets.”
Some of the very issues that the SEC is trying to solve could be answered through the use of cryptocurrencies and blockchain technology.
Typical exchanges, in contrast to crypto exchanges, are kept in a certain amount of control by auditory bodies and legal entities, these ensure that the markets are protected from any malpractices such as irregular or fraudulent behavior of exchanges. This is where Gün Sirer thinks blockchain tech and cryptocurrencies could revolutionize the space:
“Crypto assets are special and different. It's possible for us to implement technical measures that can prohibit such malfeasance by construction. That is, crypto has the opportunity to not only meet, but exceed the standard to which the SEC holds Wall Street. We can lead the world here and lead every other asset class through judicious and careful use of technology, and facilitate the tokenization of conventional assets in the process. Of course, this requires a switch away from blind speculation in rigged markets, toward better technological developments. The sooner the crypto community gets behind a unified push to clean up exchanges and implement better, high-assurance decentralized exchanges, the sooner SEC-approved ETFs will become a reality.”
Regarding Market Volatility
With the SEC's announcement that it would review its initial findings has already had a notable impact on the cryptocurrency markets. One of the examples of this being Bitcoin rebounding after an initial pull-back following the initial rejection on August 22nd.
It also marks a week of market volatility for cryptocurrencies. Marked also by the influence that China has had, particularly, because of its latest crackdown on cryptocurrency related events in various parts of Beijing. Apart from that, Bitcoins performance over this week has been better, with some rallies, but hovering at roughly $6,790 in terms of trading.
What do you guys think about SEC's big move and announcement to re-review and examine the staff's action towards all nine bitcoin ETFs being denied? Does it signal a deeper meaning and could it signal an upcoming approval? As cryptocurrency adoption continues to make its path no matter how long the bear market lasts, the bulls are being groomed and ready to start running – could SEC's Bitcoin ETF approval be the catalyst so many bitcoiners are looking for? Let us know your thoughts below!