The SEC Still Doesn’t Like Spot Bitcoin ETFs

The latest rejection shows how far the bitcoin ETF war has left to go.

CoinDesk Insights
Nov 16, 2021 at 5:30 p.m. UTC
Updated Nov 16, 2021 at 5:42 p.m. UTC

Danny is CoinDesk's deputy business editor. He owns BTC, ETH and SOL.

The U.S. Securities and Exchange Commission (SEC) put the kibosh on VanEck’s latest attempt to launch a spot bitcoin exchange-traded fund (ETF).

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When (spot) ETF?

The narrative

Staffers at the SEC shanked yet another spot bitcoin ETF application last Friday, ending VanEck’s hopes to one-up those shiny new futures ETFs with a physically backed product.

Why it matters

Investors have long seen a spot bitcoin ETF as a milestone in crypto’s breakthrough to mainstream investing. October’s rack of futures-linked ETF launches may have already captured headline pizazz (and billions of dollars to boot) but that ultimate goal, and its promise of more efficient returns, remains elusive. The reason? SEC staffers are just as skeptical of market manipulation on spot bitcoin as ever.

Breaking it down

Was anyone surprised that the SEC denied another bitcoin ETF application?

I certainly wasn’t. When the the SEC rejected VanEck’s application last Friday, it followed a longstanding tradition of stonewalling any and every physically backed crypto ETF product. That history began in summer 2018 with the Winklevoss twins falling flat. Three plus years later and the song remains the same.

Has it, though? Not quite. For starters, other countries like Brazil have jumped ahead of the U.S. by green-lighting their own bitcoin ETFs; Canada even has an ether product. And there are any number of crypto exchange-traded products in Europe.

U.S. investors haven’t been left entirely in the dark. Last month’s bitcoin futures ETF launches capped a multi-year battle to bring bitcoin exposure to the investing masses. All it took was a crypto-savvy SEC chair spelling out exactly what kind of product could hope to make it through.

But the war is far from won. Critics of the bitcoin-linked ProShares and Valkyrie funds – by happenstance VanEck launches its own today, too – will argue the products are inefficient and expensive mechanisms through which investors gain bitcoin price exposure. Quirks of the futures market and regulatory concerns hamstring their usefulness. In short, they’ve got nothing on the real thing.

Something is better than nothing, though. Getting even an inefficient and pricey bitcoin vehicle through the SEC’s gates is a watershed for crypto. It shows the regulator slowly warming to the reality that people want bitcoin exposure. It shows a regulator accepting that it can make that reality happen and still exercise super-tight control.

Last week’s rejection shows a true blue bitcoin ETF is far, far from approval for all the same reasons – It represents a lack of control. The SEC spelled it out in the VanEck denial letter: Bitcoin markets are too prone to market manipulation to let an ETF tracking spot prices go live.

They’ve said it all before; their arguments have not changed. Like a vindictive professor flunking a student, the SEC gave VanEck’s latest spot application – which the regulator at times called repetitive, illogical and poorly sourced – a resounding F.

It’s doubtful that another hopeful issuer could soon succeed where VanEck floundered. The SEC is simply too suspicious of the bitcoin markets and their potential for manipulation to let it slide. Anyone arguing that bitcoin’s decentralization makes the token uniquely resistant to funny business (proving this quality is one way around the blockade) takes on a Sisyphusian task. Avenue 2 – establishing a “surveillance sharing agreement” – seems equally unlikely to win any time soon.

For a bitcoin ETF to win the day its issuer must establish what the SEC calls a “surveillance sharing agreement” with another major, compliance-minded market upon which the asset trades. It’s a simple argument, really. Any would-be manipulator would need to influence one market to reap gains on the other. If both those markets share data, then better the chances to catch the crook.

CME’s bitcoin futures market would seemingly fit this model. Trading over one billion dollars in bitcoin futures contracts daily, it’s a major, heavily regulated outpost for the crypto markets. But it’s a drop in the bucket of bitcoin’s global footprint. According to the SEC, it’s far too small to matter; it doesn’t lead the market. Spot ETF application DENIED.

And yet here we are mid-November 2021 with a rather odd assortment of facts. CME futures contracts are good enough to be an ETF benchmark, but not good enough for a separate product’s behind-the-scenes role.

It all makes you think: How much longer will the largely pliant crypto industry play nice?

“I wonder how long before one of the spot bitcoin ETF sponsors gets sick of arguing with a brick wall & decides to sue the SEC for an APA violation,” tweeted Jake Chervinsky, a crypto law veteran who is now head of policy for industry lobbyist The Blockchain Association.

“I get why nobody did this before, but the case is stronger now with futures ETFs live, & the incentive to play nice is much weaker.”

Biden’s Rule

Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)

It’s been a quiet week in Bidenland with no confirmation movement of note.

Elsewhere

Outside CoinDesk:

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See ya’ll next week!

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