The US Securities and Exchange Commission has denied a bid to list a bitcoin-tied exchange-traded fund (ETF), citing the risk of fraud and a lack of regulation among the world’s bitcoin markets.
The decision caps a more than three-year quest by bitcoin investors Cameron and Tyler Winklevoss, who first sought to list the bitcoin-tied product in mid-2013. The SEC has been weighing a proposed rule change that would pave the way for the ETF to be listed on the Bats BZX Exchange.
In that time, the SEC has solicited numerous public comments and punted its decision forward several times. As well, the ETF’s backers have expanded the scope of the offering from an initial $20m to $100m.
According to a publicly distributed notice detailing the decision, the SEC said:
“As discussed further below, the Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, 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.”
The agency went on to specify that it believes a mix of regulatory opaqueness and fraud risk should preclude any kind of bitcoin ETF at this time.
The SEC said:
“The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. 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.”
That said, the SEC left the door open to future exchange products tied to the digital currency.
“The Commission notes that bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop,” the document reads. “Should such markets develop, the Commission could consider whether a bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act.”
The full ETF decision can be found below:
there must be significant, regulated derivatives markets related to the underlying asset with which the Exchange can enter into a surveillance-sharing agreement.
Basis for Disapproval
The Commission has, in past approvals of commodity-trust ETPs, emphasized the importance of surveillance-sharing agreements between the national securities exchange listing and trading the ETP, and significant markets relating to the underlying asset.
Such agreements, which are a necessary tool to enable the ETP-listing exchange to detect and deter manipulative conduct, enable the exchange to meet its obligation under Section 6(b)(5) of the Exchange Act to have rules that are designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.
As described above, the Exchange has not entered into a surveillance-sharing agreement with a significant, regulated, bitcoin-related market. The Commission also does not believe, as discussed above, that the proposal supports a finding that the significant markets for bitcoin or derivatives on bitcoin are regulated markets with which the Exchange can enter into such an agreement. Therefore, as the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs, the Commission does not find the proposed rule change to be consistent with the Exchange Act and, accordingly, disapproves the proposed rule change.
See supra note 96 and accompanying text.
15 U.S.C. 78f(b)(5).
38 The Commission notes that bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop.
Should such markets develop, the Commission could consider whether a bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act.
For the reasons set forth above, the Commission does not find that the proposed rule change, as modified by Amendment Nos. 1 and 2, is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange, and in particular, with Section 6(b)(5) of the Exchange Act. IT IS THEREFORE ORDERED, pursuant to Section 19(b)(2) of the Exchange Act, that the proposed rule change (SR-BatsBZX-2016-30), as modified by Amendments No. 1 and 2, be, and it hereby is, disapproved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Eduardo A. Aleman Assistant Secretary
The Exchange notes, for example, that the CME and the ICE recently announced bitcoin pricing indexes. See Amendment No. 1, supra note 1, 81 FR at 76666. In the future, regulated futures or derivative markets might begin to trade products based on these indexes.
17 CFR 200.30-3(a)(12).
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