The SEC rejected two proposals to list and trade shares in two Bitcoin exchange-traded funds ("ETFs").
The SEC rejected a proposal from NYSE Arca, Inc. ("Arca") to list and trade shares of the Valkyrie Bitcoin Fund. The SEC also rejected a proposal from CBOE BZX Exchange, Inc. ("BZX") to list and trade shares of the Kryptoin Bitcoin ETF Trust.
The SEC assessed whether the exchanges (i) had a comprehensive surveillance-sharing agreement with a significant, regulated market, and (ii) could effectively prevent fraudulent and manipulative activity. In the rejected proposals, the SEC noted its concerns over the abilities of the exchanges to adequately meet the requirements under SEA Section 6(b)(5) ("Determination by Commission Requisite to Registration of Applicant as a National Securities Exchange") in protecting investors and the public interest by preventing fraudulent and manipulative practices.
The SEC rejected Arca's argument that (i) liquidity, (ii) price arbitrage, and (iii) frameworks to value assets would be sufficient to mitigate potential manipulation.
Similarly, the SEC rejected BZX's proposal, concluding "that BZX has not established that it has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to bitcoin," and "that BZX has not established that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement."
As a result, the SEC found that both exchanges had failed to prove that they could meet their burdens under SEA Section 6(b)(5).
Commentary
Given the size of the Bitcoin market and the fact that futures trading of Bitcoin has been going on for awhile without problems, it would seem likely at this point that the SEC's refusal to permit the listing of Bitcoin ETFs is founded on a desire to not encourage further retail investment, including indirect investment, in the product. Although one can be sympathetic to the SEC's worries as to retail investors, the SEC is not supposed to serve as a gatekeeper on the wisdom of investments. See the 2020 dissent by Commissioner Hester M. Peirce as to SEC Rejects Proposal to List and Trade Bitcoins on Regulated Exchange.
Primary Sources
- SEC Order: Disapproving a Proposed Rule Change to List and Trade Shares of the Valkyrie Bitcoin Fund under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)
- SEC Order: Disapproving a Proposed Rule Change to List and Trade Shares of the Kryptoin Bitcoin ETF Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.