On Wednesday (October 9), the U.S. Securities and Exchange Commission (SEC) issued a 112-page order disapproving the proposed rule change—filed by NYSE Arca —to list and trade shares of the Bitwise Bitcoin ETF Trust.

Background

Here is a brief recap of what happened prior to the disapproval of the Bitwise Bitcoin ETF:

  • On 28 January 2019, NYSE Arca filed with the SEC a proposal rule change to list and trade shares of the Bitwise Bitcoin ETF Trust.
  • This rule change proposal was published in the Federal Register on 15 February 2019.
  • On 29 March 2019, the SEC asked for more time to make a decision on this proposal (i.e. approve, disapprove, or start proceedings to decide whether or not to disapprove).
  • On 7 May 2019, NYSE Arca filed an amendment ("Amendment No. 1") to its original proposal.
  • On 14 May 2019, published the amended proposal ("for notice and comment") and initiated proceedings to decide whether to disapprove or not.
  • On 12 August 2019, the SEC asked for more time (with October 13 being the final deadline for a decision).

SEC's Disapproval Order

The SEC's order points out that its disapproval of this Bitcoin ETF proposal should not be taken to mean that Bitcoin or blockchain technology as no merit as "an innovation or an investment." Instead, it is disapproving this proposal for the following reason:

Rather, the Commission is disapproving this proposed rule change because, as discussed below, NYSE Arca has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), and, in particular, the requirement that the rules of a national securities exchange be 'designed to prevent fraudulent and manipulative acts and practices'.

The SEC's main concern seems to be "fraudulent and manipulative acts and practices." To address this concern, the listing exchange for an exchange-traded product (ETP) must either "establish that the underlying commodity market is inherently resistant to fraud and manipulation" or prove that "other means to prevent fraudulent and manipulative acts and practices will be sufficient." If it cannot do either of these, then it must "enter into a surveillance-sharing agreement with a regulated market of significant size relating to the underlying or reference assets". Such agreements deter market manipulation because they make it easier to get the information necessary for launching a full investigation should a manipulation occur.

What the SEC means by "market of significant size" is a market or group of markets for which:

  • (a) "there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP"; and
  • (b) "it is unlikely that trading in the ETP would be the predominant influence on prices in that market."

The SEC's order goes on to say that it disapproved the proposed rule change because:

... among other things, the Sponsor has asserted that 95% of the bitcoin spot market consists of fake and non-economic activity, but has not established that it has in fact identified the 'real' bitcoin market, or that the 'real' bitcoin market is isolated from the fraudulent and manipulative activity, we find, in each case, that NYSE Arca has not met its burden to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5)...

Reaction From Bitwise Asset Management

In a press release published around 20:00 ET on October 9, Matt Hougan, Bitwise Asset Management's Head of Research, commented on the SEC's order.

Here were the main highlights:

  • Bitwise appreciates the SEC's detailed, thoughtful, and invaluable feedback regarding the proposed Bitcoin ETF.
  • Bitwise sees this feedback as a good thing since it "provides critical context and a clear pathway for ETF applicants to continue moving forward on efforts to list a bitcoin ETF."
  • Bitwise will continue its dialog with the SEC, and will re-file as soon as it believes that it is "appropriate" to do so.
  • Bitwise also notes that "the bitcoin market itself has evolved in important and positive ways in recent years" (e.g. the development of several qualified crypto custodians).

Hougan concludes by saying:

While we were not able to satisfy the SEC's concerns inside the statutory 240-day review window afforded these filings, and while they have identified the need for additional data and context to interpret our key findings, we are pleased with the progress that the industry has made and believe that, with additional research and continued progress in the broader ecosystem, the remaining concerns and challenges raised in this order will ultimately be satisfied.

Reaction From the Crypto Community

Jake Chervinsky, General Counsel for decentralized finance (DeFi) startup Compound, a prominent legal analyst/commentator on crypto-related regulations, had this to say:

Effect of the SEC's Disapproval Order on Bitcoin Price

Fortunately for the crypto markets, very few people really expected the SEC to approve a Bitcoin ETF this year, and so it is not surprising that the price of Bitcoin has not been adversely affected by the SEC's decision to disapprove the Bitwise Bitcoin ETF.

According to CryptoCompare , in the past 24-hour period, the Bitcoin price has gone up 4.21%:

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