Submitted by: Joshua Kelly, Compliance Consultant, Red Oak Compliance Solutions
On July 26, the price of Bitcoin fell 3 percent after the SEC rejected an attempt to create the first cryptocurrency-based ETF. This was the second time that the SEC rejected a bitcoin ETF application by Cameron and Tyler Winklevoss, the founders of the crypto exchange Gemini, after the SEC rejected their application in March due to concerns over the potential manipulation of the cryptocurrency market. While the SEC emphasized their “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,” it does present some concern regarding the viability of future cryptocurrency ETF applications, such as those proposed by VanEck and SolidX.
The Winklevoss’ argued that their ETF proposal was consistent with Section 6(b)(5) of the Exchange Act, which requires that the rules of a national securities exchange be designed “to Prevent fraud and manipulative acts and practices” and “to protect investors and the public interest.” 15 U.S.C. 78 F(b)(5). They said that the “geographically diverse and continuous nature of bitcoin trading makes it difficult and prohibitively costly to manipulate the price of bitcoin” and that cryptocurrencies are “generally less susceptible to manipulation than the equity, fixed income, and commodity futures markets”, therefore, traditional measures to detect and deter manipulation are sufficient. The SEC disagrees.
The March Disapproval Order required a surveillance sharing agreement between the ETP listing exchange and significant regulated markets to deter fraud and manipulation, finding that cryptocurrency ETPs were not “inherently resistant” to market manipulation, as alleged by Winklevoss. The SEC now reaffirms their decision citing numerous academic papers indicating Bitcoin can be and has been, manipulated through Bitcoin Trading venues.
In addition to denying Winklevoss’ proposal, for the second time, the SEC delayed deliberations on five other Bitcoin ETFs. Given the continued skepticism by the SEC and various state administrators into the nature of blockchain-related investments, it seems that any investor seeking to enter this space should do so with an equally skeptical mindset.
Click here to read the CSNBC article.
Click here to view the full SEC order.
