August 23rd – Updated information regarding yesterday’s SEC decision. The original story is below this latest news.
SEC Commissioner Hester Peirce, the lone dissent in last month’s denial of the Winklevoss ETF proposal, announced via Twitter this afternoon that yesterday’s staff decision to disapprove the proposed Bitcoin ETFs from NYSE/ProShares, CBOE GraniteShares and NYSE/Direxion have been stayed pending Commission review.
Authority to approve or disapprove proposed ETFs has been permanently delegated by the Commission to the SEC’s Division of Trading and Markets. When or if the Division issues a denial, the applicant may file a Petition to Review within ten days and, if granted, the Division’s decision will be reviewed by the seated Commissioners.
Less commonly, even in the absence of a Petition to Review filing, pursuant to SEC Rule 431 any one Commissioner may vote to bring the matter before the Commission for review.
In all three cases from yesterday, the review was initiated by Commissioner(s). It’s not yet known which Commissioners initiated the review, and SEC rules do not provide a timetable for a final decision.
Original article – August 22nd
In a surprise move today, the SEC’s Division of Trading and Markets issued orders disapproving all three pending futures-based ETFs. While the NYSE/ProShares decision was due tomorrow, August 23rd, final decision dates for CBOE/GraniteShares and NYSE/Direxion were September 15th and 21st, respectively.
The three decisions read mostly the same. In all proposals the SEC made it clear that the denials were in no way a judgement of Bitcoin’s value or utility, stating that “the Commission emphasizes that its disapproval does not rest on an evaluation of whether Bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.”
Citing the Winklevoss decision, the Commission said that unless the applying exchange establishes other means to prevent fraud and manipulation, the standard they’ve traditionally applied must be met. The defined standard is that the “exchange must enter into a surveillance-sharing agreement with a regulated market of significant size.”
The SEC considers a market of “significant size” to be one where: (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 note that in prior ETF approvals, each was dealing with “a large futures market that had been trading for a number of years before an exchange proposed an ETP based on those futures.” As reported by the applying exchanges, the total CME volume through August 10th has been 14,185 Bitcoins, and CFE volume was 5,184 Bitcoins. The Commision says they have no way to know whether those are significant volumes or not, as none of the applicants presented evidence that they were.
The SEC also cites some of the concerning public comments they received, including:
“One commenter states that the commencing an ETP without allowing the market to adjust to the cash-settled futures products would be akin to ‘putting the cart before the horse’ and seems to be an attempt to appease institutional investors.”
“Three commenters assert that there is manipulation in the Bitcoin market. One commenter states that it is common knowledge that the Bitcoin market is being manipulated and asserts that BitConnect, which was recently shut down and had promised risk-free annual returns of up to 120%, is an example of Ponzi and multi-level marketing schemes that are too common.”
While surprising that all three decisions came today, given the SEC’s standard that a surveillance sharing agreement must exist with an established exchange with significant trading volume (unless other means of preventing fraud and manipulation exist), none of the three can be approved, as no qualified exchanges currently operate. If there is a positive aspect of all three decisions being issued at once, it is that it settles some uncertainty that would have remained in the market if the Commission had spread out the decisions to their final due dates. This timing appears as a responsible move by the Commission to potentially minimize disruption of the markets that might have occurred with separate decisions over time.
The three denials leave just one Bitcoin ETF proposal, from CBOE/SolidX, undecided. A physically-backed Bitcoin ETF, as SharkCIA reported here, the CBOE proposal is designed with means of preventing manipulation not offered in today’s three denials. The next decision date for CBOE/SolidX is September 30th, but final decision could be extended until as late as February 27th, 2019.
Link to the SEC August 22nd decision: https://www.sec.gov/rules/sro/nysearca/2018/34-83904.pdf
Links to the August 23rd SEC notifications sent to the exchanges: