SEC Commissioner Voices Dissent Over Rejection Of Bitcoin ETF

Yesterday, the SEC rejected a Bitcoin ETF backed by Winklevoss’ twins, founders of Gemini exchange, citing concerns of fraud and alleged price manipulation of Bitcoin. The exchange had also expressed concerns that over 75% of Bitcoin trading volume happens outside the US.

The application, which was filed by CBOE Global Markets, to list Bitcoin ETF on the Bats BZX Exchange was turned down based on a 3-1 vote. As expected the decision was a big disappointment to cryptocurrency market, leading to a sharp decline in the price of Bitcoin. Surprisingly, Hester Peirce, a SEC Commissioner has voiced her dissent to the ruling made yesterday.

Notably, about a year ago, the SEC rejected a similar application for Bitcoin ETF backed by Winklevoss twins. So far, the SEC has not approved any Bitcoin ETF for the reasons mentioned above. An approval would have led the way for institutional investors to invest in the asset. In June, an application seeking a rule change was filed. The application tried to address the concerns of the regulator.

Commissioner Pierce begins by saying

“I respectfully dissent from the Commission’s order disapproving a proposed rule change, as amended, to list and trade shares of the Winklevoss Bitcoin Trust on Bats BZX Exchange, Inc. (“BZX”).”

The commissioner raises questions about the motivations behind the ruling

“In addition, I am concerned that the Commission’s approach undermines investor protection by precluding greater institutionalization of the bitcoin market. More institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order. More generally, the Commission’s interpretation and application of the statutory standard sends a strong signal that innovation is unwelcome in our markets, a signal that may have effects far beyond the fate of bitcoin ETPs. I will discuss each of these issues in turn.”

Pierce opines that BZX will benefit by performing the conditional duties under the supervision of the SEC

“Because the disapproval order focuses on the bitcoin spot market, it does not give adequate weight to the important function that exchanges, as self-regulatory organizations (“SROs”), perform under our regulatory framework. BZX should, and would, play a central role in monitoring trading in shares of the Trust. In performing that function, BZX would exercise the responsibilities entrusted to it as an SRO and would be subject to Commission oversight. In exercising these responsibilities, BZX would have powerful regulatory and business incentives to ensure the integrity of the products that it lists for trading. Nothing in the record suggests that BZX is unwilling or unable to fulfill its responsibilities under the Exchange Act.”

The Commissioner also pointed out continuous repression against the market forces.

“The disapproval order discourages new institutional participants from entering this market. Worse, it suggests that approval for bitcoin ETPs will come only when bitcoin spot and derivatives markets have matured substantially, yet, at the same time, contributes to further delay in their maturation, as potential institutional investors may reasonably conclude that the Commission will continue to repress market forces for the foreseeable future. As long as these investors decline to enter the bitcoin market because there is no efficient vehicle that would reduce the costs of entry, the features of the bitcoin market that cause the Commission concern are likely to persist.”

Pierce also asked the SEC for “merit regulation”.

“By precluding approval of cryptocurrency-based ETPs for the foreseeable future, the Commission is engaging in merit regulation. Bitcoin is a new phenomenon, and its long-term viability is uncertain. It may succeed; it may fail. The Commission, however, is not well positioned to assess the likelihood of either outcome, for bitcoin or any other asset. Many investors have expressed an interest in gaining exposure to bitcoin, and a subset of these investors would prefer to gain exposure without owning bitcoin directly. 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 Commission’s action today deprives investors of this choice. I reject the role of gatekeeper of innovation—a role very different from (and, indeed, inconsistent with) our mission of protecting investors, fostering capital formation, and facilitating fair, orderly, and efficient markets. Accordingly, I dissent.”

The SEC released a filing on its decision, citing ongoing concerns for investors.

“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. Rather, the Commission is disapproving this proposed rule change because, as discussed in detail below, BZX has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices.”

The BZX exchange has claimed that Bitcoin is not easy to manipulate. The arguments were highlighted by the SEC in its filing.

“BZX argues, among other things, that its proposal is consistent with Exchange Act Section 6(b)(5) on the grounds that the ‘geographically diverse and continuous nature of bitcoin trading makes it difficult and prohibitively costly to manipulate the price of bitcoin’—and that therefore the bitcoin market ‘generally is less susceptible to manipulation than the equity, fixed income, and commodity futures markets’—and because ‘novel systems intrinsic to this new market provide unique additional protections that are unavailable in traditional commodity markets.’”

Although the points made in favor of Bitcoin ETF failed to convince the SEC, the cryptocommunity is hopeful that Bitcoin-related markets will gain acceptance in the future.