The deadline for decisions on three bitcoin ETF proposals came August 23rd. A total of 9 products were submitted by Bethsada, Maryland based ProShares, New York, New York based Granite Shares and Milwaukee, Wisconsin based Direxion. All were rejected by the SEC, and their comments show a strong thread of reasoning behind their decision. However, this is not detrimental to cryptocurrency adoption, and in fact could be a major indirect benefit to awareness, education and future adoption.
ProShares and Granite Shares were both attempting to register two products, a Bitcoin ETF and Short Bitcoin ETF. Direxion proposed five products related to price movement of Bitcoin. There were two for going short, Daily Bitcoin 1X and 2X Bear Shares, and two for going long, Daily Bitcoin 1.25X, 1.5X and 2X Bull Shares. GraniteShares Bitcoin ETF was planned for the Cboe Exchange, while the ProShares and Bull Shares proposals were planned for the NYSE Arca exchange platform.
Market Manipulation Fears
In response to all three, the SEC noted several reasons behind their decision. However, the single, primary reason that ran similarly in all three responses by the SEC regarded uncertainty behind cryptocurrency assets. Their concern is not over the security of the individual coins themselves, but rather the value they hold.
The issues comes from the inability of the exchanges where the proposed ETFs would be traded to guard against market manipulation:
“…the Exchange has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”
The small size of the global cryptocurrency market relative to other asset markets plays into these concerns. The SEC cited the issue and how it plays into price manipulation. Where a market is not large enough or does not have enough liquidity, it is possible for groups with major holdings to dictate market movements.
Alternatives to Long and Short Based
Although these submissions have been rejected, there are still two more proposals in review with the SEC. These newer submissions take different routes to legitimizing cryptocurrency as a possible exchange traded product.
VanEck and SolidX submitted a joint application to represent their Bitcoin ETF proposals. It was published on July 2, and the decision was delayed until September 30, 2018 by the SEC earlier this month.
Rather than proposing a Bitcoin futures-based fund, the application proposes a physically-backed model. The Shares of the Trust are expected to be listed on the Cboe BZX Exchange.
In October 2017, Bitwise Investments launched the world’s first cryptocurrency index fund. The company proposed an ETF to the SEC that uses that index instead of futures, as the two rejected proposals did. The Bitwise index fund “HOLD 10” is a mix of BTC, ETH, XRP, BCH, LTC, DASH, NEO, ZEC, XMR and ETC, weighted by a 5-year-diluted market cap. On July 24, 2018, the index was submitted to the SEC as the “Bitwise ETF Trust.”
“Our view is that this new area has many similarities to the introduction 10 to 15 years ago of commodity ETFs. At that time, we saw the launch of single-commodity ETFs tracking gold, silver, crude oil, and other commodities, as well as ETFs tracking diversified commodity index baskets. We see a lot of similarities here.”
Because the primary reason for rejecting the proposals is concern with functionality of the cryptocurrency market and its size overall, it’s unlikely these two other proposals will be accepted either. But these events are still crucial for government regulators education and public awareness.
The continued work by these investment companies creates buzz around the coins and technology overall. News regarding nationally, or globally traded assets backed by cryptocurrency makes headlines news, even if it’s when three bitcoin ETF proposals are rejected. It still pushes boundaries toward long term growth and potential exchange traded products in the future.
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