Bitcoin has exploded in popularity over the years, yet many investors continue to need help accessing these emerging assets through traditional financial channels.
This has led to the idea of Bitcoin ETFs, to provide a simpler, more accessible way to get exposure to the Bitcoin market. However, the U.S. Securities and Exchange Commission (SEC) has consistently rejected every proposal brought before them.
But why did the SEC stubbornly reject Bitcoin spot ETFs despite being approved in other countries?
Let’s take a deep dive into the reasons the SEC has hesitated and the immense regulatory hurdles that a Bitcoin ETF faces.
Understanding ETFs and The Regulatory Environment
Before diving into the SEC’s regulatory issues and reasons, let’s define what an ETF is.
An ETF, or exchange-traded fund, is a type of investment that tracks the performance of an underlying asset or group of assets, which includes stocks, bonds, commodities, currencies, or cryptocurrencies.
Bitcoin ETFs are designed to mirror the price movements of Bitcoin, offering a convenient way for retail and institutional investors to participate in these price fluctuations without the need to directly buy or store the assets
Moreover, Bitcoin ETFs can be traded just like other stocks, such as those of Apple or Microsoft, within the same brokerage accounts and IRAs that investors already possess.
It’s important to note that there are two distinct types of Bitcoin ETFs: Bitcoin futures ETFs, overseen by the Commodity Futures Trading Commission (CFTC), and spot Bitcoin ETFs, which fall under the jurisdiction of the U.S. Securities and Exchange Commission (SEC).
The SEC derives its regulatory authority from the Securities Exchange Act of 1934. This legislation grants the agency broad powers to oversee and regulate securities products, exchanges, and markets within the United States. Spot Bitcoin ETFs fall under this category.
The SEC’s Perspectives on Bitcoin and Digital Assets
The SEC’s stance on Bitcoin and digital assets is multifaceted and evolving as the agency tries to strike a balance between protecting investors and nurturing innovation within the crypto industry.
The agency has actively participated in regulating various aspects of the digital asset market, including initial coin offerings (ICOs), exchange-traded funds (ETFs), custody, and trading.
In a speech delivered at the Aspen Security Forum on August 3, 2021, SEC Chairman, Gary Gensler shed light on the regulatory perspective, emphasizing the existence of “gaps” in the protection of investors in the crypto market
According to Gensler, the SEC is focused on ensuring disclosure requirements and establishing a regulatory framework. He also suggested that cryptocurrency exchanges should register with the SEC, similar to other securities exchanges.
His speech also underscored concerns about market volatility and the lack of consistent oversight across a largely unregulated global bitcoin trading ecosystem.
The SEC has initiated numerous enforcement actions against crypto exchange companies that engage in illegal securities offerings or deceptive business.
In June 2023, the regulator filed lawsuits against Binance and Coinbase, alleging that both were operating as unregistered securities exchanges and facilitating trading in cryptocurrency that should have been registered as securities.
The SEC has been reluctant to approve spot Bitcoin ETFs for many reasons. Some of these reasons are consistently cited as deficiencies centered around Section 6 of the Securities Exchange Act, with concerns predominantly focused on fraud and manipulation within the underlying spot market.
While the SEC does not categorically prohibit Bitcoin ETFs outright, it maintained that proposed listings have failed to demonstrate the required safeguards as mandated by the Securities Exchange Act.
Some specific reasons cited across SEC rejection orders include:
- The lack of surveillance-sharing agreements (SSAs) between major spot exchanges and regulated U.S. securities exchanges listing the ETF, hinders coordinated oversight.
- There are concerns regarding fraudulent and manipulative trading activity on unregulated global Bitcoin spot exchanges, potentially impacting the ETF price.
- The unregistered status of Bitcoin spot exchanges as national securities exchanges with the SEC under the Securities Exchange Act precludes direct SEC regulation.
- The CME Bitcoin futures market, while regulated, remains relatively small compared to global Bitcoin spot trading. Its limited scope prevents it from being a surveillance panacea.
- Worry a large Bitcoin ETF could exert an inordinate influence on Bitcoin spot prices through arbitrage trading. This raises manipulation concerns.
- Highlighted issues about custody controls and the verification of asset holdings, given the cybersecurity risks associated with cryptocurrencies.
While these reasons are presented on a case-by-case basis, the underlying theme remains consistent: the SEC does not believe that Bitcoin trading ecosystems have matured sufficiently, offering the required protections and regulatory oversight to safeguard Bitcoin ETF investors against undue risks.
Case Studies: Rejected Bitcoin ETF Proposals
In this section, we will review some of the major Bitcoin ETF proposals that have been rejected by the SEC and the reasons behind their disapproval.
- Winklevoss Bitcoin Trust: The initial attempt at a Bitcoin ETF was made by Cameron and Tyler Winklevoss, who proposed the Winklevoss Bitcoin Trust in July 2013. This ETF aimed to be listed on the NASDAQ and track Bitcoin prices on their Gemini Exchange.
The SEC officially rejected the proposal in March 2017, citing the failure of the applicants to demonstrate that the Bitcoin market was sufficiently resistant to manipulation and their failure to enter into a surveillance-sharing agreement with a regulated market of significant size related to Bitcoin.
- VanEck SolidX Bitcoin Trust: SolidX submitted a proposal for its Bitcoin fund in July 2013, subsequently partnering with prominent fund manager VanEck. The VanEck SolidX Bitcoin Trust proposal was withdrawn in January 2019 after experiencing multiple delays and extensions from the SEC.
Overall, the SEC has consistently ruled that all Bitcoin spot ETF applicants have failed to meet the burden of demonstrating comprehensive protections against market manipulation in accordance with the Exchange Act requirements.
Industry Response and Criticism
The crypto industry strongly disagrees with the SEC’s justifications for rejecting Bitcoin ETFs. Some critics accuse the regulator of unfairly stifling innovation and obstructing investor access. The Bitcoin Market is argued to have matured greatly since the early ETF proposals, with increased liquidity, regulation, and transparency.
Some people also accused the SEC of being unfairly biased for not approving spot ETFs but approving Bitcoin futures ETFs instead which are more expensive and less efficient for investors.
Also, this delay is creating a competitive disadvantage for the U.S. market, as other jurisdiction such as Canada and Brazil has already launched the same products.
The Path Forward: Potential For Future Approval
Despite this series of rejections, there are still signs that the SEC may be changing its stance and becoming open to the idea of approving bitcoin ETFs in the near future.
The SEC has already approved several futures-based bitcoin ETFs, which use bitcoin futures contracts as their underlying assets rather than spot bitcoin.
It is important to note that the SEC chairman, Gary Gensler, who took office in April 2023, was a former MIT professor who taught courses on blockchain and digital currencies and has expressed a positive view of the innovation and potential of the crypto space.
Additionally, the regulatory body is facing increasing pressure and competition from other countries, like Canada and Brazil, that have already approved and launched spot bitcoin ETFs. These products have proven to be successful and have not encountered any major issues or scandals so far.
The SEC may be concerned that it is losing its global leadership and influence in the crypto space and that it is depriving U.S. investors of a fair and equal opportunity to access the Bitcoin market in a regulated and secure way. However, crypto regulations indeed offer many benefits.
It is safe to say that the SEC rejection of Bitcoin ETFs has been a source of frustration and controversy in the crypto industry. Despite the growing popularity of Bitcoin and the emergence of similar investment products in other countries, the SEC has remained steadfast in its concerns and reluctance to approve these ETFs.
However, as the crypto industry continues to evolve and mature, the SEC may find it increasingly challenging to maintain its position on Bitcoin ETFs. It is in the best interest of both U.S. investors and the global standing of the SEC to carefully evaluate the evolving landscape of cryptocurrencies and consider providing a regulated pathway for investors to access the Bitcoin market
In doing so, the SEC can strike a balance between investor protection and fostering innovation in the crypto space, ensuring that the United States remains a competitive and influential player in this rapidly expanding industry.