Despite the various advantages of cryptocurrencies’ market maturity and innovation, the SEC still has concerns about the potential of pure-play bitcoin exchange-traded funds. The Securities and Exchange Commission (SEC) believe their queries about the potential for financial fragility and systemic risk of virtual currencies are valid, which could be why the regulator has turned down all spot BTC ETFs proposals.
SEC’s Constant Disapproval of ETFs
An exchange-traded fund is a type of investment vehicle that aims to track the performance of a specific asset or group of assets. It can diversify an investor’s portfolio without directly owning the underlying assets.
The first rule filing to list a product that tracks bitcoin in the US was submitted on June 30, 2016. It was submitted by the exchange operated by brothers Cameron and Tyler Winklevoss. The Securities and Exchange Commission rejected the application for the Winklevoss ETF due to its concerns about the potential manipulation and fraud in the bitcoin market.
According to the Securities and Exchange Commission website, the agency aims to promote a healthy and fair market environment. It also seeks to protect investors and maintain a level playing field. Despite the agency’s concerns about the potential risks associated with cryptocurrencies, the SEC still plays a role in protecting consumers.
Despite the rejection of the Winklevoss ETF, other applications for similar products are still in front of the SEC. These products could get rejected if the agency’s concerns are not resolved. Here is why SEC is still adamant about approving Bitcoin ETFs;
Fraud and Manipulation Concerns
The price of futures contracts is determined using the reference rates set by various regulated spot exchanges, such as Coinbase and Kraken. This process ensures that the data is reliable and resilient. Notably, the spot trading platforms do not just determine the prices of futures contracts. They also consider the various factors that affect the price of a contract.
The price data collected by these exchanges create a reference price representative of the prevailing market price. This method ensures that Bitcoin futures are not susceptible to manipulation. The US Commodity Futures Trading Commission (CFTC) was comfortable with the self-certifications of these exchanges.
Although a regulated exchange creates the futures contract, the spot market is more decentralized and can include other companies that are not regulated. It could mean that the SEC sees the difference between the two products.
Crypto Price Manipulation
The Securities and Exchange Commission is still investigating the possible manipulation of the price of cryptocurrencies by Bitfinex. According to reports, the company used its stablecoin, known as Tether, to boost the prices of various digital assets in 2017.
A study conducted by John Griffin, a finance professor at the University of Texas at Austin, and Amin Shams, a business professor at Ohio State University, revealed that a portion of the increase in the price of bitcoin was due to a manipulation scheme. Between March 2017 and March 2018, the total market value of bitcoin increased by more than $300 billion.
Gary Gensler, the Securities and Exchange Commission chairman, states that stablecoins should be categorized under the agency’s jurisdiction. He noted that these types of assets could be used to invest in corporate bonds. The US Treasury Department also stated that the SEC has the authority to oversee the activities of stablecoins.
In February, the New York Attorney General accused the company of misleading investors regarding the number of reserves that it had. The following month, the US Commodities Futures Trading Commission ordered the company to pay over $40 million. The SEC is also reportedly looking into other stablecoin projects.
Political reasons might also be at play. In July of 2021, Senator Elizabeth Warren of Massachusetts asked the SEC to look into the operations of cryptocurrency exchanges. In a letter to Gensler, she requested an analysis of the industry’s safety and operations. She additionally asked for the agency’s recommendations on how it could protect investors.
Despite the increasing popularity of cryptocurrencies, the lack of regulations has left investors at the mercy of fraudsters and manipulative individuals, undermining the financial markets’ safety. The SEC should use its authority to address these risks and ensure that the public can access a safe and secure marketplace. Congress should also step up to close these gaps and protect the country’s financial markets.
Other Jurisdictions Approve ETFs
Another reason for frustration is that many international exchange-traded funds (ETFs) focused on the exchange-traded holding of bitcoin and other digital assets have been operating without issues for several years. In February, Canada’s regulators approved the first bitcoin-focused exchange-traded fund (ETF). The fund, which is managed by Purpose Investments, is called BTCC.
Most jurisdictions worldwide have approved physical Bitcoin exchange-traded funds (ETFs). In addition, millions of Americans have also bought and sold cryptocurrencies on multiple platforms.
According to Dave Abner, the head of business development at Gemini, the company’s model for providing investors with a secure and predictable solution for bitcoin is similar to that of other traditional investment products. It eliminates the need for investors to manually manage their assets and provides them with returns that align with their underlying assets.
When Will SEC Approve ETFs
Despite the various challenges that face the approval process for bitcoin exchange-traded funds, many are still optimistic that the approval will come in late 2022. The SEC is also developing new regulations to help prevent market manipulation and fraud.
According to Craig Salm, the head of legal at Grayscale, the company has been asked by the SEC about its spot bitcoin ETF plans. The Commission is also interested in learning more about the index methodology and the various types of exchanges that it will cover.
Before the approval process can be complete, the index provider must provide the necessary information about its operations and pricing. They can do this through a series of conversations with the clients, and maybe the SEC will approve ETFs.
Successful approval of bitcoin exchange-traded funds would allow more conservative investors to participate in the industry. It would also have a positive impact on the price of bitcoin.