The U.S. Securities and Exchange Commission (SEC) approved a bitcoin futures ETF last week. Unlike previous futures ETF applications, this one was filed under the “33 Act” (or the Securities Act of 1933) and the “34 Act” (or the Securities Exchange Act of 1934). All of the past bitcoin futures ETFs were filed under “40 Act” (the Investment Company Act of 1940).
I asked last year whether 2021 would be the year of the bitcoin ETF and concluded – in February – that the answer was basically 🤷. The question now is whether 2022 will be the year of the spot bitcoin ETF, and the answer seems to be more 🙅 than 🤷.
SEC Chairman Gary Gensler said last year he felt more comfortable with 40 Act funds because of the investor protections enshrined within the law, as well as the market surveillance tools overseeing the futures market. The bulk of the volume is on Chicago Mercantile Exchange, a traditional firm with long-standing surveillance tools in place.
The SEC’s recent rejection orders seem to echo this premise.
“The Commission concludes that 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 Exchange Act Section 6(b)(5), and in particular, the requirement that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest,’” SEC staffers wrote in rejecting the ARK21Shares Bitcoin ETF.
The SEC used identical language a month earlier in rejecting the NYDIG Bitcoin ETF.
But, people want a bitcoin ETF. A Nasdaq survey of 500 financial advisers found that 72% would be more comfortable investing in crypto if there was also a spot ETF.
An important caveat here is this survey was of 500 financial advisers who are already considering allocating funds to crypto, and so the respondents weren’t necessarily representative of financial advisers at large in the U.S.
Let’s back up. The reason I’m talking about this today is that the SEC approved Teucrium’s bitcoin futures ETF to begin trading last week. Unlike ProShares, Valkyrie or VanEck, Teucrium filed for a 33 Act fund. The approval jump-started fresh speculation that a spot bitcoin ETF may be closer to approval.
At the very least, the 33 Act approval would seem to serve as evidence should a company such as CoinDesk sister firm Grayscale decide to file a legal challenge of some sort to a future SEC rejection.
Grayscale has already argued that the previous futures ETF approvals created ground for the approval of a spot ETF (Grayscale filed to convert its Grayscale Bitcoin Trust to an ETF).
The bitcoin derivatives markets have identical exposure to fraud and manipulation that the spot markets might have, Grayscale’s attorneys wrote in a letter to the regulator last year.
“It is of course foundational that the Commission – like any other federal regulatory agency – must treat like situations alike absent reasoned justification,” the letter said.
The SEC took aim at that argument in its Teucrium approval order, with staffers writing that they accepted NYSE Arca’s argument that for anyone to manipulate bitcoin futures ETF prices, they would have to manipulate CME’s bitcoin futures market directly, and not just the bitcoin spot market.
“The Commission has considered and rejected nearly identical arguments in past disapproval orders of spot bitcoin ETPs (exchange-traded products). Moreover, the Commission finds arguments centered around the relationship between the bitcoin spot market and the CME bitcoin futures market to be inapposite where, as here, the proposed ‘significant’ market (i.e., the CME bitcoin futures market) is the same as the market on which the proposed ETP’s only non-cash assets (i.e., CME bitcoin futures contracts) trade,” the SEC wrote.
In its recent rejections, the SEC wrote that the stock exchanges sponsoring spot crypto ETFs have “not sufficiently” argued against the agency’s concerns about manipulation and fraud.
“Such possible sources have included (1) ‘wash’ trading, (2) persons with a dominant position in bitcoin manipulating bitcoin pricing, (3) hacking of the bitcoin network and trading platforms, (4) malicious control of the bitcoin network, (5) trading based on material, non-public information, including the dissemination of false and misleading information, (6) manipulative activity involving the purported ‘stablecoin’ Tether (USDT), and (7) fraud and manipulation at bitcoin trading platforms,” the SEC wrote.
The agency has also said it’s concerned that the crypto spot exchanges are themselves unregulated (left unsaid is that they are unregulated at the federal level, not the state level as every U.S. crypto exchange is supposed to be).
Given that the SEC has consistently expressed concerns about market manipulation in rejecting spot bitcoin ETF applications, it seems likely (to me anyway) that the agency will continue to reject spot ETF applications, at least for the foreseeable future.
