The SEC Division of Trading and Markets rejected applications for nine exchange-traded funds ("ETFs") tied to bitcoin futures markets from three separate companies – ProShares, Direxion, and GraniteShares – on the grounds that they lacked adequate means of preventing "fraudulent and manipulative acts and practices." In each case, the rejections were subsequently stayed pending review by the SEC Commissioners.
The SEC affirmed its position that bitcoin futures markets necessitate stringent market manipulation and fraud prevention procedures since they are reliant upon a single exchange to determine the value of the bitcoin ETF. According to the SEC, the companies stated in their applications that they would use the Chicago Board Options Exchange ("CBOE") and Chicago Mercantile Exchange ("CME") futures market to establish the value of their ETFs. However, the SEC determined that the CBOE and CME bitcoin futures markets are not "markets of significant size." Furthermore, the SEC did not agree that the companies' existing surveillance procedures and capacity to share surveillance information with U.S. futures exchanges were sufficient to prevent market manipulation and fraud.
Commentary / Joseph V. Moreno
This development will likely not come as a surprise to the industry. The SEC's across-the-board rejections of these bitcoin ETFs comes on the heels of its rejection in July of the second go-around of a bitcoin-backed ETF supported by Cameron and Tyler Winklevoss. Regulator concerns about price manipulation and fraud in the cryptocurrency markets will likely not be alleviated until and unless the market reaches critical mass – a chicken and egg problem. Hopefully last month's dissent from Commissioner Hester Peirce indicates that at least one of the sitting Commissioners remains open-minded about the potential of this technology and the value of helping to legitimize it through regulatory approval.
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