In case you missed it, on our last Adoption Piece, we failed to dig into how the crypto Watchdogs are hindering crypto adoption. Well, although all factors are equally instrumental in driving crypto, the most notorious one with the most power to cause a domino effect to the rest is the US Securities and Exchange Commission (SEC) rejecting exchange-traded funds (ETFs).
While ETFs have emerged as an ideal method of trading cryptocurrency, especially for institutional investors, SEC doesn’t seem persuaded regarding their essence and, in turn, have rejected one ETF proposal after the other.
Keep reading and find out how SEC deters crypto adoption while taking a gander at the list of cryptocurrency EFTs that this board has rejected over time.
What Is a Cryptocurrency ETF?
For starters, crypto ETFs refer to a type of index fund which provides a way for investors to take part in the portfolio of cryptocurrencies without really having to go through the process of acquiring and securing the same. Therein, cryptocurrency investors collaborate with financial entities that hold such assets on the behalf and allow them to buy and sell as they please in exchange for a brokerage fee.
ETFs allow investors to speculate on the price movements and trade the underlying asset with delegated risks. This is because the platform providing investors with the ETF assumes responsibility for upholding the security of the assets, thus effectively alleviating the investor from this responsibility.
ETFs can be either take the form of physical ownership or a futures contract, an agreement between two financial institutions that an asset will be bought at a future price, instead of the current price.
The functioning of cryptocurrency ETF is well compared to company stocks. ETFs are created based on an asset owned by a financial organization. The performance of that particular asset is then tracked. The price movement of the assets is reflected in the price of each ETF stock, making either profit or losses for investors.
List of ETFs Proposals Rejected by SEC
SEC has rejected close to all ETFs proposal citing different reasons. The Winklevoss twins were the first institution to petition SEC to approve the $BTC ETF proposal back in 2013 just when Bitcoin’s price was beginning to explode. SEC, however, took almost four years to come to a decision, which was to reject the proposal. The Winklevoss again files a second proposal, which was again rejected.
In August 2018, SEC again rejected nine Bitcoin ETF proposals filed by ProShares, Direxion, and GraniteShares. Despite the institutions giving separate reasons why SEC should grant them Bitcoin ETF, SEC rejected the proposals on common grounds.
SEC cited that the rejection wasn’t related to the potential of Bitcoin and blockchain technology to serve as utility or as an investment. SEC notes that the rejection was because none of the exchanges could sufficiently demonstrate the ability to avert fraudulent and manipulative acts and practices that are common in the crypto sector. SEC also pointed out the rejection of the inability of the exchanges to demonstrate that Bitcoin futures markets are “markets of significant size.”
All cryptocurrency ETFs proposal filed to SEC over the course of five years have all been rejected on the same grounds-the likelihood of market manipulations coupled with lack of a regulated market of significant size. SEC notes that for ETF’s proposal to be approved, the Bitcoin futures markets must be of significant size, notably because cryptocurrency exchanges have failed to demonstrate their capability to prevent fraud and manipulation by implementing functional measures. Thus, “surveillance-sharing with a regulated market of significant size related to Bitcoin” is needed to satisfy the legal requirements of preventing fraud and manipulation in ETF trading. ETF proposal filed by Wilshire Phoenix and NYSE Arca is still awaiting approval filed by Wilshire Phoenix and NYSE Arca.
Bitwise Case is the Special One
Bitwise is the most recent victim to be denied the node to set up ETFs by SEC. On Oct 9, 2019, SEC announced that the ETF proposal filed by Bitwise Asset Management in collaboration with NYSE Arca on the grounds that it did not meet legal requirements to prevent market manipulation or other illicit activities. Nonetheless, SEC pointed the rejection to NYSE Arca instead of Bitwise’s proposal itself.
Part of SEC’s ruling read:
“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”.
This will be the second time SEC rejects the Bitwise ETF proposal. Bitwise initial ETF proposal filling was in January 2019, where the company sought to offer its customers a regulated bitcoin product and also be the first firm to launch ETF in the US.
On Jan 15, 2020, Bitwise surprisingly withdrew its Bitcoin exchange-traded fund( ETF) proposal. A note submitted to the US Securities and Exchange Commission(SEC) stated that the withdrawal was “consistent with the public interest and protection of investors.”
Bitwise’s global head of research, Matt Hougan confirming the move indicated that:
“We did indeed withdraw the application. This is a procedural step, and we intend to refile our application at an appropriate time.”
Hougan also stated that Bitwise is working to resolve the issues raised by the SEC in rejecting the initial filling. Bitwise is yet to release timelines for refiling the proposal.
Why ETFs is Instrumental in Crypto Adoption
ETFs substantially contributed to crypto adoption by simplifying cryptocurrency investments. With ETF, you really don’t need to learn all the processes involved in investing and storing cryptos since the investment company offering ETFs assumes all the logistical responsibility. Investors easily create a diversified portfolio and also invest in an extensive portfolio of cryptocurrencies simply and effectively.
ETFs also lowers the risk of crypto hacking, which is a major factor discouraging cryptocurrency investments. Finally, ETFs keep transaction fees incredibly low, therefore increasing profit margins. Unlike ETFs, traditionally-managed funds usually charge investors a huge premium fee, thus cutting on the accrued profits.
With SEC yet to approve a single cryptocurrency ETF proposal, the agency is undoubtedly deterring crypto adoption. ETFs are an excellent solution to cryptocurrency institutional investors in improving profit margins and also lowering risks involved in crypto investments. There is a need for the crypto space to develop mechanisms to prevent market manipulation and also prevent fraudulent acts. With such measures implemented, SEC will have no reason for rejecting ETFs proposals.