The United States Securities and Exchanges Commission [SEC] recently rejected a proposal for an exchange-traded fund backed by Bitcoin [BTC] submitted by the Winklevoss. The proposal was rejected because it is not “designed to prevent fraudulent and manipulative acts and practices [and] to protect investors and the public interest”.
This rejection was met with dissent from SEC Commissioner Hester Maria Peirce, who previously served as a lawyer specializing in financial market regulation. The ruling was 3-1 in favor of rejection, with Peirce being for accepting the fund. On Twitter, she vehemently opposed the decision, stating:
“Apparently, bitcoin is not ripe enough, respectable enough, or regulated enough to be worthy of our markets. I dissent.”
Attached with the tweet was her statement of dissent regarding the decision made by the SEC. She stated that the rule change that allowed for the trading of ETF satisfies the regulatory and statutory standards regarding the same. While the SEC determined that it was not, Peirce urged the commission to trade the Bitcoin-based ETF, asking to set aside the ‘action’ taken by the staff and approve the proposed change.
She argued that the approach by the SEC undermines the principles of investor protection. This is due to the lower level of institutionalization in the market due to the SEC’s distance from the market as a whole. She stated:
“More institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order. More generally, the Commission’s interpretation and application of the statutory standard sends a strong signal that innovation is unwelcome in our markets, a signal that may have effects far beyond the fate of bitcoin ETPs.”
The SEC’s reasons for not approving the product is because they think that the Bitcoin market as a whole is subject to manipulation, said Peirce. This is apparent from the rejection of BZX Exchange’s argument that the Bitcoin market is “resistant to manipulation”.
Moreover, she argued for BZX Exchange’s case, stating that the rules enforced by the SEC for initial and continued listing are detailed in the exchange’s proposed rule filing. This includes requirements such as obligations to deter market manipulation and to make transactions records of market makers available on request. She also stated that the exchange has the ability to halt trading in response to “market conditions that are inconsistent with the maintenance of a fair and orderly market”.
Mainly, Peirce stated that the disapproval order would stunt the entry of institutionalization into the cryptocurrency market. She argued that the movement of Bitcoin ETPs into the market would foster a sense of institutionalization that would target the problems that the Commission faces with the Bitcoin market. She further added:
“While I contend that the markets are already better connected by active arbitrageurs than the Commission’s order suggests, the establishment of an ETP would invite more price arbitrage and thus better connections among markets. Because authorized participants could compose their baskets with bitcoin obtained from any source, the availability of the ETP would bring prices at different exchanges closer together.”
She also spoke about participation by institutional investors into the market, which would then drive stronger custody solutions due to the number of funds. This would, in turn, increase the security in the markets and hence make it more difficult to manipulate markets. However, she produced a negative view of the market, stating:
“The disapproval order discourages new institutional participants from entering this market. Worse, it suggests that approval for bitcoin ETPs will come only when bitcoin spot and derivatives markets have matured substantially.”
Furthermore, she stated that the disapproval order undermines investor protection, albeit unintentionally. This occurs due to investors being prevented from entering the Bitcoin market through exchange-traded funds.
“To maximize investor choice, foster competition, and avoid unnecessarily depriving investors of protections available under the Exchange Act and BZX’s rules, I would approve this order and welcome the Commission’s consideration of other bitcoin-based ETPs that offer different pricing mechanisms, are pegged to bitcoin futures markets, seek to be registered under the Investment Company Act of 1940.”
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