On July 26, 2018, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) issued an order, by a 3-1 vote, disapproving a proposed rule change (the “Proposal”) that would have allowed for a bitcoin exchange-traded product (“ETP”) (the “Order”). In the Order, the SEC re-asserted many of its prior concerns and reasons for denying the same proposal for a bitcoin ETP back in March 2017.
Specifically, the SEC had three core concerns for rejecting the Proposal:
- The Susceptibility of Bitcoin and Bitcoin Markets to Manipulation: The SEC did not find that the spot market for bitcoin is resistant to manipulation. The SEC expressed concern about the risk of hacking and malicious control of the Bitcoin Network. The SEC was also concerned with whether market participants may be able to manipulate trading on a single trading venue by concentrating trading in one place.
- The Availability of “Traditional Means” to Detect and Deter Fraud and Manipulation: For the SEC, Bats BZX Exchange, Inc. (“BZX”) (the national securities exchange proposing change to its rules to allow for the bitcoin ETP) did not demonstrate that its assertions of safeguards were strong enough to satisfy the Securities Exchange Act of 1934 (the “Exchange Act”) requirements for preventing fraudulent and manipulative acts. BZX had made the argument that even without surveillance-sharing agreements with a regulated bitcoin market, it would be able to obtain information regarding the trading in shares of the ETP and the underlying bitcoin spot markets.
- The Absence of Surveillance-Sharing Agreements with Sufficiently Regulated Underlying Bitcoin Spot Markets: Especially because the SEC felt as though there were not inherent safeguards in the bitcoin spot markets, the SEC expressed concerns over the lack of surveillance-sharing agreements between BZX and a sufficiently regulated market related to bitcoin as a means for protecting against fraud and manipulation. Although one such surveillance-sharing agreement existed between BZX and an underlying bitcoin exchange, the agreement was not deemed sufficient by the SEC. The Commission found that there was not enough evidence in the record to support that the bitcoin exchange was a “regulated market” comparable to a national securities exchange or to the futures exchanges that are associated with the underlying assets of the commodity-trust ETPs approved to date, even though the bitcoin exchange is supervised by the New York State Department of Financial Services.
SEC Commissioner Hester M. Peirce issued a separate dissent in which she argued for approving the Proposal in part to further the institutional push into bitcoin markets as a means to create new products that could in turn help prevent fraud and manipulation.