Why BitConnect Was Mentioned In SEC’s Bitcoin ETF Disapproval Statement

In an announcement made today, the United States' regulatory body: The Securities and Exchange Commission (SEC) came to a final ruling for ETF proposals, ruling against them on the deadline set in the initial consideration. Among those ETFs, which were rejected, consisted of BitConnect, which was initially proposed by NYSE Arca.

NYSE Arca had pushed for a rule change with the SEC in order to list and trade the ProShares Bitcoin ETF and Short Bitcoin ETF. This proposal was officially filed on the 4th of December, 2017. And after such time, the commission ruled to prolong the decision on whether to approve or disapprove the rule change until the month of January 2018.

In the aftermath of this, the SEC provided a statement in the month of July 2018, which stated that they would be postponing the decision once again, citing that it was within their remit to ask for a delay, but also citing that they required more time to come to an effective judgement. It's recorded that the proposed rule change had over 13 comments, according to reports from the 21st of August, 2018. This was a day before they drew upon the decision to reject the initially proposed rule change.

The SEC took care to mention that the rejection of the ETFs ‘does not rest' on whether blockchain technology, or Bitcoin have an intrinsic value as an investment or innovation. Instead, the SEC outlined the reasons for the rejections of the proposed rule change:

  • The exchange platform has not met its burden under the Exchange and Commission Act
  • The exchange platform has not met its burden under the Commission’s Rule of Practice to demonstrate that its proposal is consistent with the requirement of the Exchanges Act Section.
  • The exchange platform does not satisfy the National Securities Exchange rule which requires for the platform to be designed in a manner which prevents fraudulent and manipulative acts and practices.

Along with this, the SEC reiterated the fact that the exchange platform had yet to provide sufficient proof that the Bitcoin Futures market had a significant enough size. This was one of the more substantial reasons for why the Winklevoss ETF was rejected earlier this year.

The SEC stated:

“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, therefore surveillance-sharing with a regulated market of significant size related 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.”

Along with these statements, out of the 13 comments raised, most stood against the approval of the proposed change to the rules. Some of the key points raised by commenters were:

  • After the analysis of a week’s data on the activity of Gemini Exchange which provides insight on the CFE bitcoin futures indicates that a ‘substantial quantity’ of BTC is purchased and sold ‘all at once’.

The nature of the market is the result of natural trading, and would lead to some form of price manipulation after enough time, the commenter believes.

  • Starting an ETP without letting the market settle down to the cash-settled futures is like ‘putting the cart before the horse’ and would look like an attempt to please the institutional investors.
  • Apart from the Bitcoin exchange-traded futures, the Bitcoin futures market is still developing. In addition, the financial institutions are interested in launching Bitcoin-related trading desks and other operations.

The commenter also identifies that the offering of both long and short ETFs would result in the creation of a two-sided market, especially if both the long and short ETFs end up possessing the same magnitude. The commenter stated that the Bitcoin ETP is not the only factor that would motivate the market makers to maintain the derivatives desks.

  • Three commenters stated that the Bitcoin market is manipulative.

Out of the six, one believed that the whole cryptocurrency community is aware that any volatility in Bitcoin is the result of some level of price manipulation.

The commenter added:

“Bitcoin market is result of manipulation through the coordinated use of high-frequency trading across multiple exchanges.”

A further commenter pointed out that the example of a Ponzi scheme within the cryptocurrency market would be BitConnect. In the past the cryptocurrency exchange platform had promised investors returns of up to 120%, since then, it has been widely regarded as one of the biggest Ponzi schemes that ever took place within the cryptocurrency market thus far. Its exchange token was once listed among the top 20 crypto coins in the market.

BitConnect has since shut down its business after a number of accusations that it operated as an overly elaborate scam erupted, culminating in both a notice from the government in the UK, and a cease and desist notice from the Texas State Securities Board.

The Commenter goes on to say:

“The commission should not send the wrong signal to bitcoin manipulators – who, the commenter asserts currently operate with impunity – by approving a bitcoin ETP”

The other reasons for the Bitcoin market being manipulative are:

  • A minor portion of the Bitcoin community can manipulate the Bitcoin and altcoins in an unregulated market. They are manipulated by traders and investors who hold a large amount of that cryptocurrency. For this, the commenter also cited Kraken, one of the leading exchange platforms, as one of the example.
  • Pump and dump schemes which are organized on online messaging apps such as Telegram is also an example of a manipulative market.

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