The U.S. Securities and Exchange Commission (SEC) made history on Friday by disapproving the Bats BZX Exchange filing to list and trade shares of the Winklevoss Bitcoin Trust. The shares, representing 0.01 BTC, would have tracked the price of bitcoins on the Gemini Exchange. The digital-asset exchange is owned and operated by the Gemini Trust Company, which would have owned the equivalent share value in bitcoins.
The SEC classified the shares as an exchange-traded product (ETP), which typically provide investors with exposure to securities or other assets such as commodities. The world's largest asset manager, Blackrock, states that the global ETP market is worth US$3.5 Trillion.
More specifically, the Winklevoss Bitcoin Trust shares are classified as a commodity-trust ETP. The SEC states that all previously approved commodity-trust ETPs have been “well-established, significant, regulated markets for trading futures on the underlying commodity, namely gold, silver, platinum, palladium, and copper.”
The SEC cites two specific requirements for approval. “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.”
“The Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs.”
- The US Securities Exchange Commission
To date, the listing exchange of any approved ETP has either entered into surveillance-sharing agreements with those markets or held Intermarket Surveillance Group membership in common with them. According to the SEC, these agreements help address concerns about the potential for fraudulent or manipulative acts and practices in this market.
Bats BZX Exchange attempted to convince the SEC that its existing surveillance measures to properly monitor trading on its exchange are sufficient to support the proposed rule change. Trading the shares would have been subject to its surveillance procedures for derivative products. Moreover, it has entered into a comprehensive surveillance-sharing agreement with the Gemini Exchange and can obtain any information about bitcoin transactions, trades, market data from the Gemini Exchange as well as through the Blockchain.
In addition, Bats highlighted that the Gemini Exchange is supervised by the NYSDFS, and subject to substantive regulation including capitalization, anti-money-laundering compliance, consumer protection, and cybersecurity requirements. However, the Commission does not believe that this makes the Gemini Exchange a “regulated market” when compared to a national securities exchange or to the futures exchanges that are associated with the underlying assets of the commodity-trust ETPs approved to date.
However, the Exchange notes that certain types of options, futures contracts for differences, and other derivative instruments are available in certain jurisdictions, but that many of these are not available in the United States and that they generally are not regulated “to the degree that U.S. investors expect derivatives instruments to be regulated.”
The SEC ruled that the proposed surveillance procedures are not sufficient. Specifically, it has not entered into and would currently be unable to enter into surveillance-sharing agreements with “significant, regulated markets for trading either bitcoin itself or derivatives on bitcoin.”
Self-reported statistics from the Gemini Exchange show that volume in the Gemini Exchange Auction is small relative to daily trading in bitcoin and to the number of bitcoin in a creation or redemption basket for the Trust. As of February 28, 2017, the average daily volume in the Gemini Exchange Auction, since its inception on September 21, 2016, has been 1195.72 bitcoins, compared to average daily worldwide volume of approximately 3.4 million bitcoins in the six months preceding February 28, 2017.
“The Commission believes that the significant markets for bitcoin are unregulated. Therefore, as the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs.”
- The US Securities Exchange Commission
The deadline for a ruling was March 11, which was a Saturday. The Commission confirmed early on Friday that the decision would be announced before the weekend. The market was initially hopeful, spurring a brief jump in spot prices. Bitcoin reached a new all-time high of $1,350 on Bitstamp, and touched $1,339.90 on Bitfinex.
The ruling came at 4PM EST and took the market by surprise, dragging the price of bitcoin down nearly 18 percent to $978.76. However, it quickly regained lost ground, much like it did during the last regulation focused announcement from the People's Bank of China. By early Saturday morning the spot price had had reached $1,200, and continued upwards on Sunday.
The Bitcoin industry has voiced a variety of opinions on the topic. Chris Burniske, the Blockchain Products Lead analyst at Ark Invest submitted a comment to the SEC in November, stating "We are not convinced that the bitcoin markets are ready to handle the potentially outsized demands that an open-end fund would place on the nascent bitcoin ecosystem."
"We see no reason to rush in securitizing what could be one of the greatest innovations of the 21st Century," states Burniske. “Given the robust market behavior post the bitcoin ETF [denial], it certainly seems the [world] has a new irreverent asset class.”
Gyft founder and CEO at Civic Vinny Lingham echoed the statement on twitter. “Approval of a Bitcoin ETF in 2017 is premature & will open the door to institutional market manipulators, putting retail investors at risk,” he argued. “What about hedge funds using cheap money to short the ETF? Shorting BTC with fiat is bad.”
Author and speaker Andreas Antonopoulos tweeted, “If you measure bitcoin's success by the approval of the incumbent and obsolete industry it replaces, you're doing it wrong.” He went on to say, “The ETF was denied because bitcoin can't be regulated, can't be surveilled. Feature, not bug.” The host of RT’s Keiser Report, Max Keiser, came to the same conclusion. “The reason to buy Bitcoin is the same as reason why SEC rejected the ETF. Can't be regulated. SEC confirmed no. 1 reason to own Bitcoin.”