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A Reprieve for Bitcoin ETFs as SEC Announces Review of Rejections?

Over the last few months, several attempts to list Bitcoin-backed ETFs with regulated securities exchanges in the USA were blocked by the SEC. Many analysts and commentators in the capital markets and cryptocurrency spaces believe a regulated financial instrument offering Bitcoin (BTC) value exposure is a crucial next step for the maturity of the standard bearer of digital currencies. With the SEC rejecting every proposed Bitcoin (BTC)-backed ETF put in front of it, the prospect of a regulated investment vehicle imminently being made available to institutional and retail investors appears to have receded.

However, yesterday, the Bitcoin (BTC) chart price rose from $6,310.11 to over $6,500 in the early hours of Friday morning after letters posted on the SEC’s website offered the possibility of a potential reprieve. Earlier in the week, the regulator’s staff had thrown out a total of 9 applications for Bitcoin-focused ETFs from 3 separate funds. The letters published yesterday announced that the SEC’s four commissioners, who have the right to review delegated decisions made by the Commission’s staff, will take another look at the applications and reasons behind the initial decision to reject them.

The Significance of Bitcoin ETFs

Launched in 2009, Bitcoin (BTC) sprang back into the limelight over the course of 2017 as the original cryptocurrency, and still by far the  largest by overall value of the currency in circulation, and saw its price rise from $1,000 to $20,000. The extent of the bull run, and the subsequent retreat of the Bitcoin price to the $6,000 to $7,000 range during 2018 to date, showed all the hallmarks of an asset bubble fuelled by intense media coverage.

However, despite the subsequent correction, Bitcoin (BTC), and the wider cryptocurrency market, have undoubtedly come out stronger  the other side. Bitcoin futures are now available on both the CME and Cboe, the two largest commodities and futures exchanges in the world. The exchange value of the cryptocurrency is also still several multiples of its pre-bubble level. There are also major new projects underway, such as Bakkt, a startup established by NYSE-owner Intercontinental Exchange (ICE), to create a federally regulated Bitcoin exchange.

Regulated ETFs would provide a vehicle offering Bitcoin (BTC) price exposure to institutional and retail investors without having to actually buy the cryptocurrency directly. This could  be inconvenient for retail investors and not compatible with the way most institutional investors work. The huge boost to liquidity that especially institutional investors would bring to Bitcoin would be expected to go a long way to reducing its exchange rate volatility. This, in turn, would pave the way to Bitcoin becoming a more feasible alternative to fiat currencies from the point of view of merchants and consumers.

Why Has the SEC So Far Blocked Proposals For Bitcoin ETFs?

All attempts to date to introduce Bitcoin ETFs, the highest profile of which was that of the Winklevoss twins (of Facebook fame and now owners of the Gemini cryptocurrency exchange), have so far been staunchly resisted by the SEC. There are concerns that the Bitcoin (BTC) price is still vulnerable to manipulation due to the strong presence of market ‘whales’ that own enough of the cryptocurrency to influence its price movement. Around a third of all Bitcoin in circulation is thought to be held by only around 1,600 investors. This, among other factors, has led the SEC to the conclusion that any Bitcoin ETF would be at risk of potential fraud and manipulation.

What Are the Chances SEC Review Will Overturn Bitcoin ETF Rejections?

Relatively low at this stage. The last time the four SEC commissioners reviewed a Bitcoin ETF rejection, the vote came down 3:1 in favour of upholding the original decision. The one commissioner to back the proposal, Hester Peirce, did so on the grounds that she felt the rejection of Bitcoin ETFs stifled innovation.

It is thought unlikely that there will have been enough of a swing in sentiment among the other 3 commissioners in the period since then to result in a different outcome this time around. The decision to review the rejections this week is most likely simply a demonstration that the SEC is taking the high-profile debate on regulated Bitcoin-backed instruments seriously. The commissioners will publically back the judgement behind the original decision delegated to the Commission’s experts.

Nonetheless, the subsequent jump in the Bitcoin (BTC) price following the review’s announcement demonstrates that those backing Bitcoin’s transition into regulated financial markets believe it represents another milestone along the path to the future approval of a BTC-backed ETF.

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