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US financial market watchdog Securities and Exchange Commission (SEC) has again rejected several applications for a Bitcoin ETF in the United States. Why do they keep rejecting the applications and what are the possible effects on the market?

The latest rejection involves two ETFs filed by ProShares that would track bitcoin futures contracts, another from GraniteShares, and five leveraged and inverse ETFs from Direxion. Similar to the rejection of the Winklevoss ETF, the SEC expressed concern about fraud and manipulation of bitcoin markets.

The SEC still has doubts about poor resistance against price manipulation. They call Bitcoin markets insufficiently controlled and the chance of fraud is still too high.

The rejection has nothing to do with the question whether Bitcoin and blockchain technology have value as innovation or investment, the SEC emphasizes. The SEC’s new disapproval is due to the concerns expressed earlier by the committee in the first rejection of a Bitcoin ETF. This earlier application came from the Winklevoss twins.

New requests

The CBOE Bitcoin ETF proposal, which may be decided as early as next month, does have physical expenditures in bitcoin. CBOE was the first to be approved by the SEC to offer Bitcoin Futures, which leaves the community cautiously optimistic. CBOE believes that offering ETF products would be beneficial for the industry and markets stating:

“This approach will allow investors to gain exposure to more mature cryptocurrencies through ETPs without the additional complications and risks of the spot market and help to ensure that American capital markets remain fertile ground for capital formation and financial innovation”

When analyzing the application, the case for the CBOE looks strong. To name a few, here are some of the most important factors that can earn the SEC’s approval:

  • History of success with SEC (well-established, recognized and regulated exchange, first be approved for BTC futures)
  • Targeting high net worth individuals/funds (each share will equal 25 bitcoins ~ $200,000 USD @ $6,500/BTC)
  • The digital assets are insured for up to $125 million (or more as needed) by various insurance companies
  • VanEck is an award-winning and widely recognized investment and money manager
  • Security and technical expertise in blockchain and cryptocurrencies from SolidX

The fund will buy and hold bitcoin (BTC)

According to the application submitted to the SEC, VanEck and SolidX’s fund will invest directly in bitcoin (BTC) unlike the CBOE Futures, which are settled in cash.

It remains to be seen whether this will happen this year or in 2019. It is not clear whether the SEC will take a decision on this bitcoin ETF in the coming months, since it has the time to do so until February 2019.

Effects on the market

After an all-time high of almost $20,000 in December last year, Bitcoin and the crypto market is now characterized by a sharp decline, with Bitcoin hovering around $6,500. Many tokens have also been hit by the bear market, and are often trading below 80% of their all-time high of last December or January. In our opinion, this correction is healthy for the long-term view. Many tokens and cryptocurrencies had already been valued for billions, while little has really been used in the real world (yet).

Analysts claim that such an ETF could intensify volatility on the crypto market. It may be that investors choose to use the ETF market to manipulate the price of Bitcoin in order to make some profit on the futures market.

Some investors claim that a Bitcoin ETF can ensure that institutional money will enter the market. Whether that actually happens should have to be seen, because not everyone embraces the crypto market. For the first time this year most of the interest in cryptocurrency came from a majority of institutional investors, namely 56%. This may suggest that these virtual coins took a first step towards more acceptance by conventional financial institutions.

And now?

In the future, it will become clear whether the SEC will be tackling to approve the world’s first bitcoin ETF. If more or better international regulations come to fruition, the bitcoin exchange rate would have to be more difficult to manipulate. The SEC recently wrote the following:

“When the market is not regulated, there must be significant regulated derivatives markets related to the underlying security with which the exchange can conclude a supervisory sharing agreement.”

If you take a look at the ten largest crypto exchanges, it turns out that there are two in countries that deal with crypto trade in an accommodating way. In any case, for Malta, flexible rules on crypto exchanges make it interesting for them to formally establish themselves in that EU country.

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