Can Bitcoin enter the mainstream financial market with exchange-traded funds (ETFs)?

Although the BTC has been short-lived for a few years, BTC exchange-traded funds (ETFs) and the US Securities and Exchange Commission (SEC) have long been secretly struggling for many years. In March 2017, the SEC rejected the BTC ETF application from the Winklevoss brothers, claiming that the underlying BTC market is still easily manipulated and difficult to regulate; as of April 2019, the SEC has not approved any BTC ETFs to be listed, the latest The comments on public consultation are basically still negative.

This is frustrating for the general public who expects ETFs to provide more legitimacy for digital assets. Although historically, the SEC may not be friendly to digital assets. But we saw hope from the SEC's contacts with BTC ETF applicants.

2017: SEC rejects multiple applications, but the public and researchers have different attitudes

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On June 30, 2016, the Bats BZX exchange submitted a rule change proposal to the SEC that would allow the Bats BZX exchange to be listed and trade with the BTC ETF to which Winklevoss belongs. If the proposal is approved, Winklevos' ETF will be the first BTC ETF to be listed on a fully regulated stock exchange. This will allow non-professionals to invest in BTC without having to hold digital assets.

Undoubtedly, if successful, this move will represent a major step forward for digital assets in the mainstream market. However, after lengthy deliberations and consultations, the SEC rejected the proposal.

On March 10, 2017, the SEC issued a statement explaining the reasons behind the decision. Among them, "it is difficult to prevent manipulation" and "fraud" are the primary reasons.

“Based on previous records, the Commission believes that most of the BTC market is unregulated. Therefore, given that the exchange has not yet entered, there is currently no access to the regulatory sharing agreements for all approved commodity-trust ETPs. Helping to address concerns about fraud or manipulation in the BTC market, but the Board found that the proposed rule change agreement was inconsistent with the Exchange Act."

Within two weeks of the publication of the results, the SEC successively rejected similar proposals submitted by the New York Stock Exchange (NYSE) parent company Intercontinental Exchange.

The NYSE hopes to list the SolidX Bitcoin Trust ETF. On March 28th, the SEC Committee reiterated many of the same words and statements as before, stating that “it did not find a proposal that complies with Article 6(b)(5) of the Exchange Act, which requires, inter alia, the National Stock Exchange The rules are designed to prevent fraud or manipulation."

As the above two things suggest, 2017 is not a friendly year for the BTC ETF.

The SEC is unlikely to license the two proposals. In addition to SolidX and Winklevoss, in January 2017, Barry Silbert's Grayscale Investments ETF applied for registration at the SEC and achieved the same results.

After receiving three negative comments from the public, the SEC issued a delayed decision on March 22. In September of the same year, the SEC withdrew the application, mainly because the encryption market was “lack of regulation”.

During the period from March to September, the public made a number of comments to the SEC, some of which were clear why Grayscale Investments is unlikely to obtain ETF approval.

For example, Mark T. Williams, a professor of finance at Boston University, wrote a seven-page letter detailing why BTC ETFs (especially from Grayscale Investments) are inappropriate. These include: BTC market's own shortcomings, such as "bad price discovery, irregular trading execution, insufficient trading volume, hoarding, low liquidity, excessive price volatility, unregulated illegal exchanges, high bankruptcy risk, And unconventional transactions and price discovery in countries outside the jurisdiction of the SEC."

At the same time, Williams also pointed out that the Digital Currency Group with Grayscale Investments and Coindesk (and other companies) “has a lot of interest in its investment products.”

Although these comments indicate that many people are extremely opposed to the BTC ETF, researchers outside the digital asset industry are very different. James J. Angel, associate professor of finance at Georgetown University, said:

“The transfer of BTC trading activity to a regulated US exchange will help improve price discovery and reduce the likelihood of market manipulation and money laundering.”

Similarly, Professor Campbell R. Harvey of Duke University wrote: “Allowing Bitcoin Investment Trust to be listed on the NYSE will be the SEC's best commitment to protecting investors, maintaining effective markets and assisting capital formation.”

Given that the six economists from six other US universities have also signed the statement, this shows that even though the SEC is still unable to approve its listing, there is still a large public support for the BTC ETF.

2018: Broader support from inside and outside the industry

At the end of 2017, there is a very real feeling that the SEC is skeptical about the BTC market, and their negative comments from people outside the digital asset industry have reinforced this attitude.

However, this situation began to improve gradually in 2018. Because, although the SEC still refused to apply for the listing of the BTC ETF, there was a different voice within the organization.

This was most evident in July. At the time, the SEC rejected the Winklevoss BTC ETF application proposed by the Bink BZX Exchange for the second time. The review revealed that Bats’ proposal failed to demonstrate that it met the “prevention of fraud and manipulation” provisions.

However, the SEC added an unusual disclaimer to the review and wrote:

“Although the committee does not approve of this rule change proposal, the SEC emphasizes that this objection does not depend on a more general assessment of BTC or blockchain technology.”

This deep meaning is self-evident.

More importantly, SEC committee member Hester Peirce (now called “Bitcoin Mom” by the community) disagreed with this decision, she wrote on July 27:

“The decision focuses on the BTC spot market characteristics, not the BZX's own capabilities.”

The SEC members' public expression of dissent has brought a subtle shift to the development of the BTC ETF. While some of the comments submitted by the SEC during the May consultation were hostile to the Winklevoss ETF, most were supportive. Also, not all of the supported letters and comments come from people in the encryption industry. It also includes voices from four global exchange operators.

For example, C&C Trading stated in its comments that it “supports the launch of the COIN ETF and believes it will be an innovative product for investors and market professionals to trade”.

Experts in the ETF manufacturing market added that "many existing ETFs are also based on opaque and non-flowing underlying tools."

Although the broader industry and public opinion generally warmed up the concept of the BTC ETF, it was not surprising that the number of proposals rejected by the SEC in 2018 set a record.

On August 22 alone, the SEC rejected nine applications, including companies such as Direxion, ProShares and GraniteShares. However, the SEC once again explained that the reason for the rejection of these applications was still that the applicants failed to prove that they met the “prevention of fraud and manipulation” rules.

The fact that the SEC has always adhered to this view is not surprising, as the decision was made shortly after the publication of the study condemning the manipulation of the encryption market.

In June of this year, researchers at the University of Texas published a paper stating that the reason for the 50% increase in BTC prices in 2017 was due to market manipulation of Tether and Bitfinex.

The US Department of Justice launched a criminal investigation into BTC price manipulation. However, in early August last year, a study published by The Wall Street Journal found that price manipulation was mainly caused by the use of Telegram and other information services by some “transaction groups”.

2019: The momentum weakens, but hopes to increase

Given these negative publicity, it is not surprising that the SEC will continue to refuse to approve the BTC ETF in 2019. Although no ETF proposal has been approved so far, we still have reason to ignite hope again. In February, SEC Commissioner Robert J. Jackson Jr. said he expected the SEC to approve a BTC ETF sooner or later.

“I think that someone will eventually meet the standards we set. I hope so.”

In the same month, a commissioner of the Commodity Futures Trading Commission (CFTC) criticized the SEC for rejecting previous ETF applications for fear of potential price manipulation. Brian Quintenz, speaking at the bipartisan policy center in Washington, DC, said:

“By setting up the index, mathematically designing contracts, even if an exchange does not have a lot of liquidity, the index itself is not easily manipulated.”

In addition to Hester Peirce's continued support for the encryption industry, such comments indicate that although approval may take longer than expected, the SEC is gradually accepting BTC ETFs.

It does take time to approve, as the prospects of the ETFs currently under review seem unclear. In February, with the encouragement of the SEC, Reality Shares withdrew its ETF trust fund, in large part because the ETF product incorporated a combination of BTC futures, sovereign debt instruments and money market mutual funds into a single derivative. Strategy.

For now, although the Chicago Board Options Exchange (CBOE) has some hopes of reapplying for the BTC ETF, the public's general negative reaction to the application has weakened this expectation.

During the public comment period, only 3 of the 18 comments submitted as of the end of March were in favor of the ETF. However, if only 15 disapproval opinions are reached, it is extremely sloppy to think that the public or the broader financial industry is becoming more and more tired of the BTC ETF.

This is because some of these comments are either lacking credibility, either insignificant or logically unreasonable. There are also some commentators who seem to be in-depth and rigorous in their arguments.

This entrenched critics has repeatedly emerged, weakening hopes that the BTC ETF may grow. For the same reason, it has been noted that there has been no significant progress in the consultation of the latest CBOE application.

Although it is difficult to draw conclusions based on a single proposal, it shows that the driving force for promoting ETFs is gradually being resolved, at least in terms of propaganda.

However, we must see another fact. The industry is still firmly supporting this idea. The financial community is eager to move and the public is actively participating.

It is not the public letter that affects the SEC approval process, but the actual evolution of the digital asset industry's maturity and regulation. In this regard, we have made a lot of progress. From the United States to Russia, to South Korea and Japan, it is only a matter of time before the SEC approves the first BTC ETF. (Mars Finance)

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