The United States Securities and Exchange Commission [SEC] has rejected another ETF. The disapproval of the ETF which included the BitConnect is the ETF proposed by the NYSE Arca.
NYSE Arca had proposed for a rule change with the SEC in order to list and trade ProShares Bitcoin ETF and Short Bitcoin ETF. The proposed rule change was filed on 4th December 2017. After which, the Commission prolonged the decision on whether to approve or disapprove the proposed rule change in the month of January 2018.
Following this, the SEC released a statement in the month of July 2018. It stated that they will be postponing the decision yet again as they required more time to come to a conclusion. It is also recorded that the proposed rule change had over 13 comments as of 21st August 2018, a day before they drew upon the decision to disapprove the proposed rule change.
The SEC stated that the rejection ‘does not rest’ on whether Bitcoin or blockchain technology has a value as an investment or innovation. The SEC rejected the proposed rule change because of the following reasons:
- The exchange platform has not met its burden under the Exchange and Commission Act
- The exchange platform has not met its burden under the Commission’s Rule of Practice to demonstrate that its proposal is consistent with the requirement of the Exchanges Act Section.
- The exchange platform does not satisfy the National Securities Exchange rule which requires for the platform to be designed in a manner which prevents fraudulent and manipulative acts and practices.
In addition to this, the SEC also states that the exchange platform has not provided sufficient proof that then Bitcoin futures market has a significant size. This is also one of the major reasons the Winklevoss ETF was rejected by the SEC.
“That failure is critical because… the exchange has failed to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, therefore surveillance-sharing with a regulated market of significant size related market of significant size related to bitcoin is necessary to satisfy the statutory requirement that the Exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.”
Furthermore, out of the 13 comments, most of them have stood against the approval of the proposed rule change. The key points mentioned by the commenters are:
- After the analysis of a week’s data on the activity of Gemini Exchange which provides insight on the CFE bitcoin futures indicates that a ‘substantial quantity’ of BTC is purchased and sold ‘all at once’.
According to the commenter, this nature of the market is the result of natural trading and would eventually lead to price manipulation.
- Starting an ETP without letting the market to settle down to the cash-settled futures is like ‘putting the cart before the horse’ and would look like an attempt to please the institutional investors
- Apart from the Bitcoin exchange-traded futures, the Bitcoin futures market is still developing. In addition, the financial institutions are interested in launching Bitcoin-related trading desks and other operations.
Along with this, the commenter also believes that the offering of long and short ETF would result in the creation of two-sided markets if both the long and short ETPs end up with the same magnitude. The commenter stated that the Bitcoin ETP is not the only factor that would motivate the market makers to maintain the derivatives desks.
- Three commenters stated that the Bitcoin market is manipulative.
Out of the six, one stated that the whole cryptocurrency community is aware of that Bitcoin volatility is the result of manipulation. The commenter said:
“Bitcoin market is result of manipulation thorugh the coordinated use of high-frequency trading across multiple exchnages.”
Another commenter states that the example of a Ponzi scheme in the cryptocurrency market is BitConnect. The exchange platform promised returns of up to 120%. BitConnect is one of the biggest Ponzi schemes which took place in the cryptocurrency market and the exchange platforms token was listed amongst the top 20 coins in the market. The exchange platform shut down its business after accusations scam erupted and they received a notice from the UK government and a cease and desist order from the Texas State Securities Board.
The commenter states:
“The commission should not send the wrong signal to bitcoin manipulators – who, the commenter asserts currently operate with impunity – by approving a bitcoin ETP”
The other reasons for the Bitcoin market being manipulative are:
- A minor portion of the Bitcoin community can manipulate the Bitcoin and altcoins in an unregulated market. They are manipulated by traders and investors who hold a large amount of that cryptocurrency. For this, the commenter also cited Kraken, one of the leading exchange platforms, as one of the example.
- Pump and dump schemes which are organized on online messaging apps such as Telegram is also an example of a manipulative market.
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