Analysis: Why has the US SEC consistently rejected the BTC ETF, and how can it promote dialogue between the two parties?

Author: Greg Cipolaro (Digital Asset Research co-founder)

Translation: Zoe Zhou

Source: Crypto Valley

Editor's note: The original title was "BTC ETFs and Pricing Make Great Progress at the Regulatory Level"

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Since 2013, digital asset market participants have been trying to get U.S. regulators to approve the operation of BTC exchange-traded funds (ETFs). According to statistics, there are already 24 ETFs submitting proposals. Except for one of them, the rest of the applications have been rejected or withdrawn by the US Securities and Exchange Commission (SEC from Wilshire Phoenix and the United States BTC and the Treasury Investment Trust are still receiving SEC approval) .

From relying on different underlying assets (such as "physical" BTC and futures traded on regulated exchanges) to different underlying index methods, these ETFs have taken a unique approach to meeting the requirements of the US Securities and Exchange Commission for ETFs. Unfortunately, none of these combinations have met the requirements of regulators. Based on our interpretation of regulatory documents and public comments from members of the Securities and Exchange Commission, these requirements evolve as this asset class matures.

The industry has been working directly with regulators to help them understand the issues they are facing. Next, we will explore the history of the US Securities and Exchange Commission's rejection of ETFs, discuss the current status around the price of BTC, and how to promote dialogue between the two parties.

The importance of BTC ETF

ETFs have many advantages over traditional investment vehicles, such as open-end funds and closed-end funds. These advantages include liquidity, access to unique asset classes and investment strategies, portfolio diversification, tax benefits, margin capabilities and low costs. Specifically, the benefits of the BTC ETF include investor protection, tax returns and asset class access.

The BTC ETF will provide investors with the protection and disclosure of federal securities laws that cannot be provided by existing BTC ownership. In addition, the ETF also improves the transparency of the underlying asset ownership through NAV, intraday liquidity and simple tax reporting. Finally, the United States operates some of the most trusted and liquid markets in the world. As a world-renowned regulator, SEC approval may be seen as a signal to other financial regulators around the world.

Reasons the SEC has opposed so far: price manipulation and fraud

In the letter of refusal and public comment on the BTC ETF, the SEC and its members have consistently raised several issues. These concerns have focused on fraud and market manipulation in the underlying market. The SEC states that these issues can be resolved in two important steps: signing a monitoring agreement with a large, regulated market; or proving that the BTC market is free of fraud and manipulation, but so far no one has The applicant succeeded in doing this.

One thing that needs to be clarified is that BTC is not currently trading on the "National Stock Exchange" registered by the US Securities and Exchange Commission. In the United States, BTC currently trades on digital asset trading platforms regulated by the Financial Crimes Enforcement Network (FinCEN) under the Department of the Treasury, and is traded by states through fund transfer licenses or the New York State Financial Services Authority's BitLicense.

BTC futures are listed and cleared on the Chicago Mercantile Exchange (CME), the Registered Designated Contract Market (DCM) and the Derivatives Clearing Organization (DCO). The trading and clearing of BTC futures is regulated by the Commodity Futures Trading Commission (CFTC). The Chicago Mercantile Exchange is regulated and participates in market surveillance and market surveillance sharing agreements.

The first step to a reliable price: find the real quantity

The SEC has been concerned about whether there is a reliable price to measure the BTC ETF. SEC Chairman Jay Clayton once said,

"Retail investors are seeing prices that they should rely on, not manipulated prices; not their own, but manipulated prices."

In order to get a reliable price, you must make economic transactions with a real buyer and a real seller.

In March 2019, the U.S. Securities and Exchange Commission met with Bitwise Asset Management, a sponsor of BTC ETF, and issued a report detailing BTC's transactions on various digital asset exchanges. According to their analysis, Bitwise claims that 95% of the reported transaction volume is "false" or the result of a false transaction. The report states that the prices of its ETFs come from "real" spot markets, which are characterized by no price manipulation or fraudulent transactions. The SEC took a different view and rejected the proposed rule change in October 2019.

Since then, progress has been made in the analysis and testing of exchange integrity, incorporating factors not considered in the original Bitwise report. Through the review, we can identify those spot markets that do not report false trading volumes, and those that have developed policies and procedures to prevent false trading or other price manipulation.

Next steps: lag relationship

In its notice against the Bitwise BTC ETF Trust, the SEC raised a new issue-the relationship between the prices of "real" trading volumes in digital asset exchanges and those that currently do not pass the censorship criteria, i.e. "leading- "Lagging" relationship. As stated in the denial:

"… I just believe that there is a problem with the reported volume and cannot replace data-driven analysis, that is, how other market participants adjust their prices in response to the prices of other platforms. Even if they agree that these platforms dominate, the transaction volume is not all false. of."

Price discovery is an important element of financial markets and has become crucial in the global fragmented BTC trading. A lead-lag study may help determine whether the BTC market can withstand price manipulation and which digital asset exchanges have real economic substance in their market activities, bringing the market closer to a market that can be trusted by regulators and investors Reliable BTC price.

Lead-lag research is ongoing. In the coming months, regulators and market participants will have a clearer understanding of whether premises engaged in suspicious activity will have a tangible impact on prices; if they do not, this will be for creators of ETFs, products and indices Very promising.

In any case, lead-lag analysis will help clarify the current market structure of this asset class and further discuss with the asset management industry, regulators, and crypto native investors in the US and globally.

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Article Source: Bitcoin Magazine

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