Journalist: Amy Tsai

On July 26, 2018, U.S. Securities and Exchange Commission (SEC) denied the bitcoin-based exchanged-traded fund (ETF) application from Winklevoss Brothers, Founders of the digital currency exchange Gemini, again after its first rejection in May 2017. This news made a significant impact on bitcoin with the steep price drop of nearly 4 percent, despite its fast recovery to 8000 dollars within 24 hours. The question is: Why was the application denied?

The Second Failure

There are few key factors that led to this decision, according to SEC’s official document:

1. The Vulnerability to Manipulation

While Bats BZX Exchange asserted that bitcoin and bitcoin markets were manipulation-free, it did not provide sufficient evidence or analysis to support this claim. As bitcoin markets are still in its early phase, there are still no comprehensive regulatory data source reflecting bitcoin pricing. With additional concerns such as hacking and fraudulent acts, the Commission therefore decided that bitcoin markets were not “inherently resist to manipulation.”

2. No Surveillance-Sharing Agreements with Regulated Markets of Significant Size Related to Bitcoin

Although BZX contended that it has entered into a comprehensive surveillance-sharing agreement with the Gemini on bitcoin trading and that Gemini was supervised by New York State Department of Financial Services (NYSDFS), the Commission argued that Gemini was not a “regulated market” comparable to a national securities exchange or to the future exchanges associated with Exchange Traded Products (ETP). Even if Gemini were “regulated,” it was not demonstrated that it represented a “significant” bitcoin-related market. The lack of record support eventually led to the Commission’s conclusion that BZX has not entered into a comprehensive surveillance-sharing agreement.

3. The Protection of Investors and the Public Interest

Despite BZX’s statement that its ETP would protect investors and promote the public interest if approved, the Commission, again, found that BZX did not show any proof on the current record. According to SEC, the Commission must “consider any potential benefits in the broader context of whether the proposal meets each of the applicable requirements of the Exchange Act.” However, similar to the first cause listed in the above paragraph, since BZX did not prove its proposal is designed to be preventive against fraud and manipulative practices, the Commission decided to disapprove the proposal.

The Commission summarized its disapproval of the application based on factors including the shortage of evidence support and inconsistencies between the proposal and the Exchange Act. However, what is noteworthy is that the decision does not seem so disappointing — as the proposal was voted down 3–1, which implies an indefinite disapproval, and there are more similar proposals from other applicants incoming this September and beyond.


Experts’ Perspectives: Bitcoin ETF is Just a Matter of Time


While whether or not bitcoin is necessary to be an ETF remains disputed, investors and analysts believe that the arrival of Bitcoin ETF is just a matter of time.

According to CNN, Ali Hassan, the CEO and Co-Founder of Crescent Crypto, predicted that this product was “coming soon” and that we would see a bitcoin-only ETF as early as “in the next 18 months.”

Similar to his point of view, Kin-Wai Lau, the CEO of the Fatfish Internet Group, also stay optimistic regarding the SEC-approved Bitcoin ETF. In his recent interview on CNBC’s “The Coin Rush,” he pointed out that Bitcoin ETF was certainly “not far away” and might appear in “just a couple of months.”

A supporter of the Bitcoin ETF application from CBOE Global Markets, major foreign exchange market analyst Alex Krüger indicated that the first Bitcoin ETF might not appear in the U.S. market in 2018 due to SEC’s concern about price manipulation. However, according to his interview with CryptoSlate, he would expect SEC to “reach a decision before the final deadline, which is February 27, 2019.”

Perhaps the most convincing fact is that Hester M. Peirce, one of SEC’s Commissioner, published her dissent of the Commission’s recent decision on the BZX case under SEC’s Public Statements section. In addition to her belief that the updated proposal “satisfies the statutory standard” and therefore should be permitted, she argued that the Commission was depriving the investors of the choice whether to buy Bitcoin ETP or not and criticized that the Commission did not weigh on bitcoin’s potential outcomes in the bigger picture.

Although the specific time when Bitcoin ETF will be approved remains disputed, experts do expect a price surge upon its official entering to the U.S. market. Michael Strutton, the CEO at IronWood, predicted that bitcoin price would rise to somewhere between $26,000 and $44,000 due to the 420 billion dollars from U.S. and global investors adding to the market cap.

Likewise, according to the research conducted by Tom Alford, he predicted a 500% increase in bitcoin after the SEC approval. Mr. Alford mentioned the similarities between bitcoin and gold for the shared properties such as scarcity, universal recognition value increase, and more, and thus drew his predictions based on the gold ETF price history.

While there are still quite some grey areas and uncertainties on when Bitcoin ETF will be approved and its impact after launch, what is known for sure is that this will be an iconic event with numerous profound implications after SEC approves the bitcoin-based ETF in the U.S. No matter whose proposal is accepted first — Once it happens, there will be still many more to come.