Within hours that the SEC announced that it has rejected a proposed bitcoin ETF submitted by the Winklevoss Twins, the bitcoin price dipped below the $8,000 mark and is now currently teetering back and forth across that psychologically-significant level. On the breaking ETF announcement earlier today.
About the ETF
The announcement comes after the SEC reviewed the application a second time, following an appeal from Gemini co-founders Cameron and Tyler Winklevoss. The SEC also opened up a fresh round of public comment for this second review. The initial application was rejected on March 10, 2017.
The Winklevoss’ modified parts of the application the SEC highlighted as problematic during the first review. The SEC performed a complete “de novo” review with the revised application, meaning the regulators treated it like a brand new application.
Reasoning Behind the Rejection
The Bats Exchange ETF, with the ticker symbol BXZ, was one of the first to submit an application to the SEC in 2017. When deciding on whether to accept a new ETF or alternative investment, the SEC follows Exchange Act Section 6(b)(5).
The main points from this regulation that the SEC considered for the BXZ ETF was whether the exchange had the ability “to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”
Regulators launched an investigation in May on whether bitcoin price movement was manipulated.
The points of contention, according to the SEC, was that bitcoin did not provide the safety against manipulation as an asset class and that the technology did not provide adequate tools for preventing fraud and money laundering. The complexities of blockchain technology required a rule modification to the Securities Exchange Act. The burden of evidence for a rule change fell on the applicants.
The Winklevoss’ Arguments Made a Strong Case
To combat the SEC’s comments on the first rejected, the new application stated:
“The geographically diverse and continuous nature of bitcoin trading makes it difficult and prohibitively costly to manipulate the price of bitcoin”13—and that therefore the bitcoin market “generally is less susceptible to manipulation than the equity, fixed income, and commodity futures markets.”
The applicants also argued that the SEC has relied too much on surveillance agreements on other ETFs that they approved in the past.
The SEC didn’t buy it, however. They argued that the “surveillance-sharing agreement” is a necessary protection against fraud and manipulation. Bitcoin, as an underlying asset class, does not have sufficient surveillance built in to prevent fraud. Though the SEC didn’t state this was a requirement, it didn’t leave many other options, especially considering that the asset class is, in some respects, designed to avoid surveillance — or at least give users tools with which they can do so.
The SEC, nevertheless, struck a somewhat-hopeful tone, stating bitcoin market regulations are still in early phases and they are watching bitcoin derivative markets to keep tabs on their popularity.
The announcement stated that the SEC is open to future applications that have sufficient modifications to support the surveillance agreement. CBOE exchange submitted an application earlier this month and it is still under review. Since CBOE is a major player in futures exchanges and has close ties with regulators, their application perhaps assuages fraud fears better.