It was no surprise when the SEC recently rejected the latest request for a spot Bitcoin ETF. It has been the SEC’s response to all such applications ever made to it. This particular request was by VanEck, who had already been denied a previous request. According to the SEC, generally speaking, the filing was not sufficiently structured to prevent fraud and manipulation. In language it has used before, the SEC said:
The commission concludes that BZX has not fulfilled its burden according to the Stock Exchange Act and the commission’s rules of practice to show that the proposal is in accordance with the requirements of Section 6(b)(5) of the Stock Exchange Act, which requires, in the relevant part, that the rules for a national stock exchanges are designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.
The more interesting part of this application was the strongly dissenting affidavit (“Dissent”) issued in response by Republican Commissioners Hester Peirce and Mark Uyeda (“the Commissioners”).
The commissioners noted that the Bitcoin market had evolved since the initial denial, and yet the SEC’s analysis remained exactly the same. But their main point concerned the way the commission treated Bitcoin ETFs differently than all other commodity-based ETPs (exchange-traded products).
The dissent explained that the SEC argues that the analysis in these denials is consistent with its approach to evaluating past holdings related to non-Bitcoin commodity-based ETPs, where “in all cases there has been at least one significant, regulated market for trading”. futures on the underlying commodity[,] and the ETP listing exchange” has had a monitoring sharing arrangement with that market. The commission concludes that the exchange has found that the applicant exchange has not established that “it is reasonably likely that a potential manipulator of the proposed ETP will have to trade on the CME bitcoin futures market in order to manipulate the proposed ETP. not established that the futures market is a “market for considerable size” relative to the bitcoin spot market.
According to the dissent, the Commission uses a uniquely onerous definition of “significant” in its analyzes of spot bitcoin ETP filings:
Rather than looking at the size and quality of the relevant futures market to determine whether it is significant, the Commission has, as of 2018, insisted that a bitcoin futures market is “significant” in determining whether listing and trading of a related product only if it meets two conditions:
(a) there is a reasonable likelihood that a person attempting to manipulate the ETP would also need to trade in that market to manipulate the ETP, such that a monitoring sharing agreement would assist the ETP listing market in detecting and deterring fraud; and (b) trading in the ETP is unlikely to be the dominant influence on prices in that market.
But, the dissent says, there is no indication that this standard applied in any of the many prior approval orders that the commission has cited to show that the “importance” of a regulated market is important in the approval of commodity-based ETPs.
According to the commissioners, the SEC has never explained why the two-part test applied to Bitcoin ETFs has never been applied to any other commodity-based ETP. The commissioners believe that this two-part test should never be used, but also point out that if it is used for any, the SEC should at least explain why it has determined that it is not necessary to apply this test to these other products it has approved, even after it has ruled that a bitcoin futures market cannot be treated as “significant” until an exchange determines that that market satisfies this two-pronged test. Furthermore, the Commission has never provided evidence that any of the non-bitcoin commodity-based ETPs could themselves satisfy the two-pronged test.
The commissioners concluded:
We believe that the Commission’s decision to subject spotbitcoin-based ETPs to a tailored standard that may be impossible for any product to meet has harmed investors by making it more difficult for the bitcoin market to mature through institutionalization and easier, and potentially safer, retail investor. access. But our concern is not only with bitcoin. If we use the test in other markets, we will prevent other products from entering the market. Had we applied the test to other commodity-based ETPs, they might not be trading today. Arbitrarily depriving investors of access to products does not protect them. Consistent application of the standards Congress gave us does.
