The Securities and Exchanges Commission (SEC) has once again rejected, 3 to 1, a four years old bitcoin ETF application by the Winklevoss twins after setting aside a previously delegated decision that also rejected it in September 2017.
In its decision laying out the reasons for rejection, the majority of the Commission says they have “considered whether the BZX proposal is consistent with Exchange Act Section 6(b)(5), which requires, in relevant part, 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.'”
Hester Peirce, Trump appointed Conservative SEC commissioner, says the other commissioners have incorrectly applied the above act. She argues in a dissenting statement:
“The Commission erroneously reads the requirements of Section 6(b)(5). The disapproval order focuses on the characteristics of the spot market for bitcoin, rather than on the ability of BZX—pursuant to its own rules—to surveil trading of and to deter manipulation in the ETP shares listed and traded on BZX.
Section 6(b)(5), however, instructs the Commission to determine whether ‘[t]he rules of the exchange’ are, among other things, ‘designed to prevent fraudulent and manipulative acts and practices [and] to promote just and equitable principles of trade,’ and ‘are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers.’ It says nothing about looking at underlying markets, as the Commission often has done in its orders.”
The majority decision focuses on whether bitcoin is inherently resistant to manipulation, and if not, whether there is a surveillance sharing agreement with a regulated entity of a “significant” size.
Many commenters had argued that arbitrage would make manipulation very difficult, that bitcoin doesn’t have earnings calls, doesn’t have opening and closing hours where manipulation can occur, and so on.
SEC however says a regulatory decision can affect the price, as can a company decision, or hacks of bitcoin, or collusion between miners, and so on. Pierce says:
“The concerns underlying the disapproval order go to the merits of bitcoin—and thus the bitcoin-based ETP at issue here—as an investment. The order raises concerns about potential future actions of potential large holders of bitcoin, academic speculation about past manipulation in the market, and the lack of regulation of the spot market.
Indeed, if the disapproval order’s rigorous standard were applied consistently, many commodity-based ETPs would be in peril, as rumors of manipulation plague many commodity markets, and surveillance-sharing agreements with regulated markets cannot eliminate the sometimes messy nature of the commodities markets.”
In a statement that suggests no bitcoin ETF is likely to approved any time soon, including the CBOE ETF filing, the majority says that there needs to be “a surveillance-sharing agreement with a regulated bitcoin market of significant size.” They further clarify to state:
“The Commission interprets the terms ‘significant market’ and ‘market of significant size’ to include a market (or group of markets) as to which (a) there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, so that a surveillance-sharing agreement would assist the ETP listing market in detecting and deterring misconduct, and (b) it is unlikely that trading in the ETP would be the predominant influence on prices in that market.”
They say no such regulated market of a significant size exists in bitcoin. Nor do the CBOE and CME bitcoin futures amount to a “significant size,” stating:
“The Commission notes that in recent testimony CFTC Chairman Giancarlo characterized the volume of the bitcoin futures markets as ‘quite small.’
The Commission also notes that the President and COO of Cboe recently acknowledged in a letter to the Commission staff that ‘the current bitcoin futures trading volumes on Cboe Futures Exchange and CME may not currently be sufficient to support ETPs seeking 100% long or short exposure to bitcoin.’
These statements reinforce the Commission’s conclusion that there is insufficient evidence to determine that the bitcoin derivatives markets are significant.”
Pierce says: “I am not convinced that the Commission’s emphasis in recent orders on whether there is a ‘regulated market of significant size’ for the underlier, as that phrase is interpreted by the Commission in the disapproval order, is the appropriate test under our prior approval orders.
It is well established that privately generated regulation can be effective at achieving well-functioning markets even absent government regulation.” She further adds:
“The disapproval order demonstrates a skeptical view of innovation, which may have an adverse effect on investor protection, efficiency, competition, and capital formation well beyond this particular product.
The disapproval order’s broad interpretation of the Commission’s statutory mandate signals that the Commission reserves for itself the authority to judge when an innovation is ripe enough, respectable enough, or regulated enough to be worthy of the securities markets.
By suggesting that bitcoin, as a novel financial product based on a novel technology that is traded on a non-traditional market, cannot be the basis of an ETP, the Commission signals an aversion to innovation that may convince entrepreneurs that they should take their ingenuity to other sectors of our economy, or to foreign markets, where their talents will be welcomed with more enthusiasm.
By withholding approval of a bitcoin-based ETP because the underlying market insufficiently resembles the markets for other commodities, we set ourselves up as the gatekeepers of innovation.”
There are currently four commissioners, when it should be five. There is just one conservative, Pierce, two democrats, Kara Stein and Robert Jackson, then the chairman, Jay Clayton, who does not appear to have any affiliation either with the Democratic or Republican party, instead being a former elite bankers lawyer with a family wealth of $50 million.
Clearly the two democrats and Clayton have voted no, with this decision probably being not of the Commission, but that of Jay Clayton for he seemingly had the decisive vote.