Bitwise Asset Management has challenged the rationale of the United States’ Securities and Exchange Commission (SEC) regarding the rejection of Bitcoin spot exchange-traded funds (ETF). In a letter written to the SEC on February 26, 2019, Bitwise argues that the regulator has failed to recognize the sources of liquidity and transparency for its rule-change proposals. The letter further contends that this has resulted in multiple rejections for proposals towards introducing Bitcoin-focused ETFs.
- 1. Bitwise Challenges SEC Denial of Bitcoin Spot ETFs
- 2. Examining the SEC’s Rejection Rationale
- 3. Assessing the Impact of the SEC’s Decision
- 4. Investigating the Possibility of Achieving Regulatory Approval in the Future
1. Bitwise Challenges SEC Denial of Bitcoin Spot ETFs
The US Securities and Exchange Commission (SEC) has recently denied a request for the listing of two Bitcoin spot exchange traded funds proposed by Bitwise Asset Management and NYSE Arca. The investment firm has opposed the decision and urged the SEC to reconsider it.
In particular, Bitwise argued that the Commission’s decision is based on an incomplete record and misunderstandings of Bitcoin markets. According to the firm, all of its assertions regarding market manipulation and market surveillance were supported by third-party data.
In October 2019, Bitwise had submitted the application for the listing of two ETFs to NYSE Arca. One of the ETFs would track a Bitcoin total return index, and the other a regulated futures index.
The SEC announcement noted that its staff had found numerous areas of concern, such as liquidity, custody and valuation. Moreover, the staff had seen significant struggles with fraudulent and manipulative activities in the spot market. Bitwise insists that the Commission’s findings to be based on misleading and incomplete data. It has further requested the staff to evaluate plain-sight data and cited rival ETF products that have not been denied by the SEC.
2. Examining the SEC’s Rejection Rationale
The United States Securities and Exchange Commissions (SEC) rejection of a Bitcoin ETF has become a big topic of conversation in the US markets. An ETF, or exchange-traded fund, is a type of security that tracks an asset, like a stock or a basket of stocks, and then makes it accessible to shareholders like a traditional stock. These ETFs are regulated by the SEC and they must meet specific standards in order for them to be approved. But, the SEC has stated that the Bitcoin ETF proposed by the VanEck SolidX Bitcoin Trust didn’t meet their requirements for approval.
The recent “reasons for disapproving” product published by the SEC in August 2019 addresses concerned questions about the different ETFs being proposed and offers a more detailed explanation for the rejections. Let’s look at some of the points raised in the statement regarding the VanEck SolidX Bitcoin Trust.
- The SEC addresses the need to prevent fraud and manipulation as a primary concern for a digital asset ETF. This has been an area of concern with the proposed ETFs, and the SEC notes that the existing Bitcoin markets “prevent surveillance-sharing with a regulated market of significant size.”
- The SEC is worried about the risk of fraud and market manipulation in a digital asset ETF package, and therefore they need to insure proper surveillance-sharing arrangements are in place. They note that certain surveillance-sharing agreements available in the current Bitcoin markets “are deficient compared with those in the commodity-based ETF context.”
- The SEC expresses particular concern about the concentration of Bitcoin trading on certain unregulated venues overseas that are known to be vulnerable to manipulation and other abusive activities, and they note that the particular proposed ETF will not be able to “detect, identify, or deter manipulative or other abusive acts and practices.”
- The SEC also notes that the existing Bitcoin trading markets lack “rules and regulations that help protect investors and the public interest.” And that the regulations in the US markets for commodities-based ETFs “operate in a manner to address these concerns.”
The SEC underlines the fact that while Bitcoin ETFs might provide investors with some of the attributes of a commodity-based ETF, it doesn’t provide the same level of protection, particularly as it relates to regulation. In summary, the SEC needs to be certain that the ETF package addressing risk, market surveillance, and manipulation is adequate and secure in order to move forward.
3. Assessing the Impact of the SEC’s Decision
The decision the Securities and Exchange Commission has made concerning the oversight of investment advisers has potentially far-reaching implications. It is important to assess the potential consequences of the ruling to ensure that it is a positive outcome for all parties involved.
At the top of the list, there needs to be a consideration of the costs associated with setting up and operating an investment advisory firm following the SEC’s new rule. This could become costly and put an extra burden on small businesses. In addition, there are the administrative costs associated with the process and ensuring that the systems are in compliance with the new regulation.
- Funds and Advisers: There is concern that the SEC rule could discourage funds and advisers from entering the market as they see the costs as too prohibitive. This could limit the range of products and services available to investors.
- Regulation: The SEC’s new regulation could also act to limit consumer choice and introduce additional elements of bureaucracy. This could, potentially, reduce the competitive pressures on existing funds, reducing the efficiency of the marketplace.
- Accessibility: Furthermore, the impact of the rule could act to reduce the accessibility of the investment advice to some segments of society, due to the perceived costs in setting up shop.
Ultimately, it is important to assess the decision made by the SEC and the potential impact it could have on the market. It is a difficult balance to find between ensuring consumer protection and maintaining a high level of competition and accessibility of services. As a result, it is vital that the potential consequences of the SEC’s decision are thoroughly analyzed.
4. Investigating the Possibility of Achieving Regulatory Approval in the Future
The successful launch of a new product or service hinges on its ability to follow compliance with the industry regulations. A key element of successful product development is assessing the possibility of achieving regulatory approval with the government and the relevant national authorities in the future. With this in mind, here are a few key elements to investigate to ensure compliance:
- Current and proposed laws and standards: Assessing industry standards and practices, as well as relevant existing and proposed regulations, can provide important insight into what may or may not be allowed.
- Regulatory interpretation: Regulations often leave room for interpretation. Oftentimes, regulatory authorities develop ground rules to clarify the angle in which certain regulations should be applied. Staying up to date on relevant interpretations of regulations is critical in ensuring compliance.
- Regulatory applications: Depending on the nature of a product or service, applications for regulatory approval may be necessary. Understanding the steps required to obtain and maintain approvals is key.
- Public comment period: Every rule or regulation that is created goes through a review and comment period. The comment period is an opportunity for the public to give their opinion on a given regulation. It is important to understand how to participate and follow this process.
Ensuring Compliance
It is important for companies to stay abreast of the applicable regulations and understand the implications of any potential changes. Companies should carefully consider all applicable laws, create relationships with the compliant authorities, and develop a regulatory compliance program to ensure success. While the process of achieving regulation approval and staying compliant can be burdensome, the payoff of long-term sustainability is worth the effort.
The Role of Technology
Technology can also play a key role in achieving regulatory approval in the future. With automation and artificial intelligence in particular offering a variety of opportunities to streamline the regulatory compliance process. This can include automating compliance assessment processes and data collection, as well as leveraging predictive analytics systems to identify potential regulatory issues before they arise.
The Bottom Line
Achieving regulatory approval in the future requires a comprehensive understanding of existing and proposed regulations, as well as an ongoing commitment to staying compliant. Technology can be leveraged to streamline the process and ensure that all necessary steps are taken to meet and exceed regulatory standards. With the right preparation and help, regulatory approval and compliance can be achieved.
The SEC has made its decision on the proposed bitcoin spot ETFs, and it’s a decision that has been met with resistance from those in the cryptocurrency community. The pushback from Bitwise indicates that some market players remain optimistic about the possibility of a bitcoin ETF in the future. Only time will tell if the SEC will come around and if an ETF is indeed on the horizon.
