The Securities and Exchange Commission (SEC) recently denied an application to create an exchange-traded fund (ETF) tied to the price of Bitcoin. In its decision, the agency cited the lack of regulatory oversight capabilities for the cryptocurrency.
Tyler and Cameron Winklevoss, who are long-established supporters of Bitcoin, were behind the ETF at issue. Bats BZX Exchange filed a proposed rule change to list and trade shares of the Winklevoss Bitcoin Trust. The ETF would have allowed the public to invest in Bitcoin by purchasing shares in the fund, which would trade on the exchange.
After soliciting public comments on the application, the SEC denied the proposed rule change, concluding that it “does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.” In further support of its decision, the SEC stated:
The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated.
In its decision, the SEC further highlighted that Bitcoin was “still in the relatively early stages of its development and that, over time, regulated Bitcoin-related markets of significant size may develop.” Accordingly, the agency may reconsider its position on Bitcoin-related ETFs should the market gain further legitimacy.
Impact on Crypto-Currencies
While Bitcoin values did initially drop 15 percent, the impact of the SEC ruling was not as significant as many had predicted. In fact, the value of other crypto-currencies, particularly Ether, have skyrocketed. Bitcoin has also already bounced back. There is no clear explanation for the market behavior. As Fortune explained:
Some commentators have suggested the recent boom comes from new digital currency converts who learned about the assets as a result of the publicity surrounding the ETF decision. Others say the recent prices simply reflect the fact that digital currencies are a far more sturdy asset than they were two years ago, and their values can no longer be derailed by a bit of negative news.
While a favorable SEC ruling would have given Bitcoin greater legitimacy, the agency’s refusal did not spell doom for the emerging crypto-currency. It did, however, confirm that the growth of the industry will continue to be unregulated, which will most likely lead to exponential growth, but also carry the twin risks of an unregulated market and how the market will respond once regulation is imposed.
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