If there was one action that could catapult Bitcoin awareness through the public masses in the United States, crypto advocates have long asserted that access to a commingled trust, a Bitcoin Exchange-Traded Fund (ETF), would do the trick. This proposition, however, has withered on the vine, as the SEC has chosen to reject every application for such an ETF, over a dozen rejections in the last two years or so. Although progress has been made, the general consensus from industry insiders is that a regime change is the only way that the SEC will ever come around to approving such a retail oriented fund.
The dust has finally settled somewhat after the SEC’s rejection of the Bitwise proposal nearly two weeks back. As we reported at the time:
With this action, the Bitwise ETF application has been tossed into the SEC’s trash heap of at least a dozen other attempts to persuade the commission to allow the general public an easy and secure access to the Bitcoin market.
Industry observers have had time to digest this action and are beginning to discuss its ramifications and what it all means.
The reporters at Coindesk interviewed a few concerned parties and summarized the present situation as follows:
The decision clarified the SEC’s concerns, which mainly revolve around market manipulation. Legal experts say a bitcoin ETF could be years away – because, in the eyes of regulators, the bitcoin market is too small and immature to support a fund right now. The SEC suggested that a surveillance-sharing agreement between a regulated exchange and a bitcoin market of “significant” size might help allay its unease.
The SEC’s rejection letter was accompanied by a 112-page tome, which included 500+ footnotes. It was a rather lengthy and wordy response, which Matt Hougan, Bitwise’s global head of research, thought was extraordinary under the circumstances and a positive guidebook for what needed to happen next:
A bad outcome would have been a cursory [filing]. After digesting it a little bit, we’re pleased with the detail the staff provided and the clarity of what we have to do.
Jake Chervinsky, general counsel at Compound Finance and a dependable opinion-giver in times like these, was more sanguine:
The SEC once again strongly rejected the idea that a bitcoin ETF sponsor can satisfy Exchange Act Section 6(b)(5) without entering surveillance-sharing agreements with regulated markets of significant size, and given bitcoin’s current market structure, it’s very unlikely that any sponsor will be able to enter such agreements within the next couple years.
Chervinsky went on to add:
It’s reasonable to assume that Jay Clayton’s SEC will never approve a bitcoin ETF. Until an ETF sponsor can satisfy the SEC’s demand for surveillance-sharing agreements – or until the SEC changes its view on the Exchange Act (which almost certainly means waiting for a new Chairman) – there will be no bitcoin ETF.
Lindsay Danas-Cohen, general counsel and chief operating officer at crypto exchange and brokerage Velocity Markets, echoed similar sentiments to Coindesk:
Under the current regime, I think it’s going to be difficult for an applicant to get all its ducks in a row in a manner that would give the SEC comfort. I think it would take a bit longer for the SEC to wrap their arms around the space.
The SEC did not cite the lack of adequate custodial arrangements or the lack of monitoring software this time around. Progress has been made. Bitwise did provide evidence that the Bitcoin market has matured, but also noted the presence of “fake volume” to the tune of 95% of industry turnover. The SEC, however, without the building of surveillance-sharing agreements between major exchanges in significant markets, felt the influence of the 95% on the “real” 5% could never be contained – End of story.