SEC Dashes Hopes of a Bitcoin ETF — For Now
The COIN ETF is a no-go.
Almost four years in the making, in a highly anticipated verdict published earlier today, the U.S. Securities and Exchange Commission has rejected the the Winklevoss Bitcoin Trust exchange traded fund (ETF).
An ETF is an investment fund that holds assets like stocks, commodities or bonds, and trades on stock exchanges. This ETF, the Winklevoss Bitcoin Trust intended to have been listed as COIN, would have let institutional investors invest in bitcoin, without actually needing to buy or hold the digital currency themselves; these would be held by a custodian, Gemini.
In its decision, the SEC singled out two major concerns regarding the application. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated.
“[T]he Commission does not find that the proposed rule change is consistent with […] the Exchange Act—which requires that the rules of a national securities exchange be designed, among other things, to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest — because the Commission believes that the significant markets for bitcoin are unregulated and that, therefore, the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that helps address concerns about the potential for fraudulent or manipulative acts and practices in the market for the Shares.”
Gemini — the bitcoin exchange operated by the Winklevoss twins and proposed custodian for COIN — is properly regulated in New York state, but only accounts for relatively low trade volumes. Meanwhile the major bitcoin markets, the SEC notes, are currently located outside of US jurisdiction.
Immediately following the announcement, the price of bitcoin dropped sharply from some $1290 to $970 and is sitting around $1120 at time of publication.
Unsurprisingly, not everyone agrees with the verdict.
“This creates a chicken-and-egg problem,” Coin Center’s Jerry Brito commented. “How do we develop well-capitalized and regulated markets in the U.S. and Europe if financial innovators aren’t allowed to bring products to market that grow domestic demand for digital currencies like Bitcoin?”
In spite of disappointment among many bitcoiners at the result, there are plenty in the community who are nonplussed by the news.
the ETFs dont add to #bitcoin utility, they give passive investors an easier way to buy the future potential, though lacking bearer property— Adam Back (@adam3us) March 10, 2017
For some, it was even viewed as an affirmation:
The ETF was denied because bitcoin can't be regulated, can't be surveilled.— Andreas (@aantonop) March 10, 2017
Feature, not bug.
“The disapproval does not change Bitcoin’s compelling fundamental growth story,” Spencer Bogart, Managing Director and Research Head at Blockchain Capital, said to Bitcoin Magazine. “We always viewed the potential for the ETF as a low-probability event that would only accelerate and de-risk the trajectory that bitcoin has already been on over the past 8 years.”
We choose to go to the Moon not because some "authority" approved the mission, but because they claimed we couldn't do it without them.— Jameson Lopp (@lopp) March 10, 2017
Besides COIN, two other bitcoin ETFs are still in the running: SolidX Bitcoin Trust and the Bitcoin Investment Trust (BIT), sponsored by Barry Silbert’s Grayscale Investments. SolidX Bitcoin Trust is due to be considered for approval by the SEC by the end of this month — BIT will take until the end of the year.
However, given the motivation to reject the Winklevoss’ ETF, Bogart considers it unlikely these two will have more luck with the SEC.
“The grounds for the disapproval suggest that the other Bitcoin ETFs that are going through the approval process are also unlikely to be approved,” he said. “It was disapproved because the markets on which bitcoin primarily trades are largely unregulated and, as such, the SEC would be unable to enter into “surveillance-sharing” agreements that, among other things, help the Commission stomp out market manipulation.”
The SEC itself, meanwhile, ended the order on a more positive note — at least for the long-term prospects of a Bitcoin ETF.
“The Commission notes that bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop,” the decision states. “Should such markets develop, the Commission could consider whether a bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act.”