In a flurry of denials on early Wednesday evening, the United States Securities and Exchange Commission rejected proposals for nine separate bitcoin ETFs.
The nine bitcoin exchange-traded products were proposed by three separate equity management firms, including ProShares, GraniteShares, and Direxion. Direxion proposed five different ETF products while ProShares and GraniteShares each proposed two.
The rejection documents are all very similar. Varying from 26 to 33 pages in length, the documents explain why the SEC denied each bitcoin ETF.
All 9 ETFs would have worked in a similar way: they would have attempted to track or beat bitcoin prices by trading bitcoin futures contracts.
The two ProShares ETFs, for example, included the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF. Both funds would have held bitcoin futures. Shares of the ETFs would have been traded on NYSE Arca.
Unfortunately, the SEC has decided that bitcoin futures markets are not mature or large enough to handle an ETF. In their denial for each of the 9 ETFs, the SEC argued that the ETF proposals did not present evidence showing that bitcoin futures markets are “markets of significant size.”
By failing to prove the markets are of significant size, the ETF proposals failed to show that the products would not be prone to fraud or manipulation.
In order for a bitcoin futures ETF to be approved at some point, the SEC insists on the implementation of some type of surveillance-sharing technology:
“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.”
In other words, the bitcoin futures marketplace is not large enough to support healthy ETF activity. There’s too much risk of manipulation.
There Is Good News for the Crypto Community Amidst the ETF Rejections
Generally, the rejection of 9 ETFs should be bad news for the crypto community. However, markets aren’t currently reacting with their usual panic sell-off. That’s because there are three pieces of good news hidden in this ETF rejection:
The SEC Isn’t Denying the Value of Blockchain Technology or Crypto
The SEC’s biggest concern continues to be market manipulation in the bitcoin futures market – and more broadly, the bitcoin market. Their goal is to protect American investors, and they can’t have investors exposed to fraudulent or manipulation-prone markets.
The SEC was careful to claim that their denial of the 9 bitcoin ETFs did not constitute a denial of blockchain technology overall:
“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.”
In other words, the SEC is not making a statement about the utility of blockchain technology, bitcoin, or cryptocurrencies in general. That’s not what this denial is about. Instead, the commission is disapproving the proposed rule change because of failure to meet its burden under SEC regulations:
“Rather, 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…”
Nobody Really Expected These 9 ETFs To Be Approved
In late July, bitcoin markets surged in anticipation of a bitcoin ETF approval in August. Bitcoin rose as high as $8,000. Then, the SEC decision on the VanEck SolidX bitcoin ETF decision was delayed, and the markets sank back down to the $6,500 range.
We didn’t see similar price movement with these latest ETFs. Out of the 9 ETFs denied today, there was a small chance of the ProShares ETFs being approved. However, few analysts expected any of the 9 ETFs to be approved. Markets didn’t surge in the weeks leading up to the announcement, and markets aren’t crashing afterward.
In other words, this shouldn’t be seen as a disappointment – it’s just an expected growing pain.
There Could Be Good News Around the Corner
The SEC had until September 21 to deny the Direxion ETFs. They had until August 23 to deny the ProShares ETFs. They chose to deny all 9 ETFs on August 22, however.
That allows the SEC to focus on the next big ETF coming down the pipeline: the VanEck SolidX Bitcoin Trust proposed by Cboe. That bitcoin ETF functions in a totally different way than the Direxion and ProShares ETFs. While the Direxion and ProShares ETFs hold bitcoin futures contracts, the VanEck SolidX bitcoin ETF holds physical bitcoin. It functions like a normal ETF – not a futures-backed ETF.
That could be an important difference. The SEC now has until September 30, 2018 to make a decision on the VanEck SolidX bitcoin ETF. They could approve, deny, or delay the decision on the ETF. If they choose to delay the decision, then we could have to wait until February 2019 for the world’s first bitcoin ETF to be approved.
Make sure you take a look at our Guide on “IF First-Ever SEC Approved Bitcoin ETF” did happen what you might be able to expect within the crypto markets. As this unfolds, now maybe the crypto community can start to focus on how big of a deal Bakkt might be within the ecosystem of blockchain assets as well as the upcoming BitWise Crypto ETF.