Bitcoin ETFs Part 2 of 3: A Not-So-Brief History of Important ETF Proposals
In this article, the second of a series of three, we will explore who is behind the most important past, present, and future ETF proposals, and why most of them have been denied by the SEC.
In the first article, we looked at what ETFs are and how they could affect crypto prices.
The possible approval of a Bitcoin exchange-traded fund by the United States SEC has been one of the most controversial topics of the cryptosphere this year, to the point of heavily impacting cryptocurrency prices. Last month, the SEC’s decision to postpone its ruling on VanEck’s third attempt at getting an ETF approved ended in one of the biggest cryptocurrency selloffs of recent times, causing Bitcoin to lose over $9 Billion, and the cryptocurrency market as a whole to drop over $40 billion overnight.
The First Winklevoss Proposal
Tylor and Cameron Winklevoss were the first ever to file a request to the US Securities and Exchange Commission for regulatory approval of a Bitcoin ETF back in the summer of 2013. The unexpected denial of the Winklevoss ETF proposal took the SEC four years to decide upon and caused Bitcoin prices to drop from over $1300 to under $1100 in a short time.
According to the filing,
The investment objective of the Trust is for the Shares to reflect the performance of the Blended Bitcoin Price of Bitcoins, less the expenses of the Trust’s operations. The Shares are designed for investors seeking a cost-effective and convenient means to gain exposure to Bitcoins with minimal credit risk.
The SEC turned down this request, citing concerns over the possibility of fraud or manipulative acts from unidentified parties, since the proposal submitted by Bats BZX Exchange, Inc. asked to alter stock exchange regulations to allow the exchange to “list and trade shares issued by the Winklevoss Bitcoin Trust”.
The document of the ruling stated that this request goes against the explicit requirement that “national securities exchanges be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest”. Furthermore, the SEC adds that,
in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products must […], satisfy two requirements […]. 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.
Blake Estes, an alternative investment expert at the law firm Alston & Bird, explained at the time,
After reading the SEC’s order disapproving the BATS rule change that would have allowed for the first bitcoin ETF to come to market, it is clear that the SEC believes that the bitcoin markets do not currently have the structural protections and controls necessary to support an ETF product. It seems unlikely that the other two bitcoin ETFs currently in registration with the SEC will be able to overcome the SEC’s discomfort with the fundamental deficiencies that it has identified in the bitcoin markets. The future may be bright for bitcoin, but the SEC seems to have determined that this emerging asset class is not yet ready for the retail investing public in the U.S.
VanEck’s First and Second ETF Attempts
After criticizing Bitcoin and calling it a ‘fad’, investment management firm VanEck made a first attempt at getting an actively-managed Bitcoin ETF listed on Nasdaq, and filed a proposal for an ETF called the “VanEck Vectors Bitcoin Strategy ETF”, which would deal with US exchange-traded Bitcoin derivatives via a Cayman Islands-domiciled subsidiary for up to 25% of its total portfolio, while the rest would be invested in fixed-income instruments like money market funds, or US Treasury bonds.
According to VanEck’s filing,
The [Bitcoin ETF] seeks to achieve its investment objective by investing, under normal circumstances, in U.S. exchange-traded bitcoin-linked derivative instruments (“Bitcoin Instruments”) and pooled investment vehicles and exchange-traded products that provide exposure to Bitcoin.
The SEC requested that the first proposal by VanEck be withdrawn, along with other ETF proposals by ProShares and Raffety Assets Management since Bitcoin futures weren’t available yet. After this request, VanEck resubmitted its proposal for a second time after CBOE Bitcoin futures were launched in December 2017, but the SEC again requested that they withdraw their proposal in January of this year. At that time, the SEC expressed concerns about “the liquidity and valuation of the underlying asset”.
The Winklevoss Twins Try Again
After their first rejection and several modifications to their proposal, Bats BZX Exchange, Inc. appealed the SEC’s decision again this year, however, the regulatory body upheld their decision, disagreeing with the Bats BZX claim that Bitcoin was under no manipulation risk, adding that the exchange did not have enough resources to guarantee investor protection, as is required of other financial institutions. In the official SEC statement, the SEC said that,
[Bats BZX Exchange, Inc.] 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.
The appeal was denied in a 3 to 1 vote, where only Commissioner Hester Peirce dissented the outcome. After the decision, Commissioner Pierce promptly published an open letter where she argued that the appeal did satisfy Section 6(b) of the Exchange Act, adding that this outcome is an obstacle for the inclusion of blockchain and cryptocurrency technologies into…
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