SEC rejects spot bitcoin ETFs due to fake and manipulated volumes
It is no mystery why the Securities and Exchange Commission (SEC) has not approved a spot bitcoin ETF. Since March 2017, the commission has repeatedly explained that it cannot allow non-US exchanges to engage in fraudulent and manipulated trading activity to mislead US investors about the true market for bitcoin.
The SEC has repeatedly, but unsuccessfully, asked crypto exchanges to share data to verify activity. According to estimates, the volume of fake bitcoin trades far outweighs the legitimate ones. Crypto index fund manager Bitwise’s online tool says 95% of bitcoin volume reported by crypto exchanges is not legitimate.
Another analysis from Forbes puts the number at 51% ⏤ far lower than Bitwise’s estimate, but still a shocking estimate of manipulation of crypto exchanges. Forbes based its estimate, published in August, on an analysis of trading volume on 157 exchanges.
To make matters worse, even US exchanges appear to be faking trading activity. In June of this year, the CFTC filed charges against Tyler and Cameron Winklevoss’ Gemini, accusing the company of lying about market manipulation on its futures platform. The CFTC also alleged that Gemini made misleading statements and omissions in 2017 regarding suspicious bitcoin trades.
Critics of the SEC’s rejection of a bitcoin spot ETF have accused the agency of being vague and anti-bitcoin. However, communications from the Commission tend to be quite specific about the concerns. Now there are five exhaustive years of response letters that ETF applicants can review.
SEC too host office hours and meetings for bitcoin ETF seekers. For example, on March 20, 2019, Lauren Yates of the SEC’s Division of Trading and Markets Office of Market Supervision cited a meeting between the SEC, Bitwise Asset Management, NYSE Arca and the law firm Vedder Price. The meeting included a discussion of NYSE Arca’s proposal to list Bitwise’s Bitcoin ETF Trust.
Yates attached slideshows from a presentation given by Bitwise. According to the presentation, Bitwise planned for the Bitcoin ETF Trust to provide direct exposure to bitcoin through a regulated, insured third-party custodian. It acknowledged the SEC’s concerns about market manipulation and said it could allay them.
95% of the exchange’s self-reported volume is unreliable
Bitwise claimed that up to 95% of the trading volume reported to CoinMarketCap regarding bitcoin trades may be fake or non-economic (laundry trading is an example of non-economic volume). Crypto exchanges continue to lie today to convey liquidity and strength – the actual size of bitcoin and all crypto markets is only a fraction of what exchanges report via their APIs.
Bitwise showed screenshots of trades from what it called a more “real” exchange – Coinbase Pro – while making the point that market manipulation is less likely to occur on US exchanges. Furthermore, offshore exchanges are likely to have less authentic trading volumes, fewer visitors to the websitea wider bid/ask spread, and fewer followers on social media.
The San Francisco-based index fund manager also said that offshore exchanges are more likely to have long periods of no trading volume and less variability in transactions.
Bitwise accused “fake” exchanges such as CoinBene and BitMart of artificially inflating their trading volumes to attract listings for which they can charge high listing fees. At the time, according to Bitwise, ICO project teams reportedly made significant money from listing fees.
For a sense of scale, Bitwise explained that the actual trading volume at the time was probably closer to $273 million than 6 billion dollars self-reported by exchanges. Only ten of the 81 largest exchanges reported remotely accurate transaction histories for bitcoin.
- Bitwise presented to the SEC in March 2019.
- Other bitcoin price index providers follow similar models to calculate a reliable price.
- Indices by Bloomberg, S&P, CF Benchmarks, Brave New Coin, Coindesk and CryptoCompare exclude all types of self-reported exchange data when calculating bitcoin’s price.
Litany of SEC rejections for spot bitcoin ETFs
Bitwise’s presentation did little to reassure the SEC. In June 2022, the SEC rejected Grayscale’s proposed Bitcoin ETF. It said Grayscale failed to address the market manipulation concerns. Grayscale quickly filed a lawsuit alleging that The SEC was wrongfully dismissed its proposal to transform its GBTC product into an ETF.
In January 2022, the SEC rejected SkyBridge’s Bitcoin ETF for similar reasons. It said SkyBridge failed to establish that it would “prevent fraudulent and manipulative acts and practices.”
Read more: Gary Gensler still backs SEC to be top crypto regulator
In November 2021, the commission also denied VanEck’s spot bitcoin ETF application. “The SEC’s decision to deny the application for the VanEck Bitcoin ETF is not a surprise, given comments made by SEC Chairman Gary Gensler in recent months,” DailyFX senior strategist Christopher Vecchio told TheStreet.
Gensler has previously hinted that the SEC intends to take its time on spot crypto ETFs until Congress provides more clarity on which regulatory body is responsible for police cases related to digital assets.
Other crypto markets are flooded in wash trading
In 2022, laundry trade received attention through analysis of NFT markets. Bloomberg wrote in April that since its launch, 95% of traders on the popular NFT marketplace LooksRare have sold NFTs to themselves. The outlet noted that the wash trade on LooksRare helped the marketplace mask a general slowdown in demand for NFTs.
Chainalysis backed it up with a report indicating that the NFT market included a lot of laundry and even a small amount of money laundering. Chainalysis’ February 2022 report on dishonest activity in the NFT space indicates that wash trades generated millions in profit for the self-dealers.
So, with no end in sight for wash trading, false volume reports and market manipulation, is there any hope for a spot bitcoin ETF? Finally, in the distant future, the SEC may approve the ETF. It has previously given bitcoin investors a glimmer of hope: commission agents approved futures-based ETFs of ProShares and Valkyrie – which began trading on NYSE Arca and NASDAQ respectively – in October 2021.
However, the commission continues to show reluctance to approve spot bitcoin ETFs or other complicated ETFs, such as products that provide leverage or short exposure to bitcoin’s price.
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