Is the SEC’s Rejection of the Wilshire Bitcoin ETF Proposal the End of Road for a Bitcoin ETF?

The SEC rejected the final bitcoin ETF proposal Wednesday evening, nixing New York-based Wilshire Phoenix’s bid to become the first investment firm to launch a Bitcoin ETF. The company had submitted its proposal in conjunction with NYSE Arca last year.  

Wilshire attempted to differentiate its product from other ETF proposals for Bitcoin by investing in treasury bonds along with bitcoin. The idea was to balance bitcoin’s price volatility with the relatively stable asset value for T-bills. In its updated filing last December, the investment firm stated that it would purchase bitcoin only once a month and avoid creation of large numbers of shares for redemption. If the cryptocurrency’s price volatility passed a certain threshold, the ETF would automatically rebalance itself and invest more in bonds. It would revert back to bitcoin, once volatility subsided.

Wilshire’s approach failed to impress the federal agency, however. In its rejection, the agency brought up the same objection – absence of surveillance-sharing agreements to prevent bitcoin price manipulation – that was used to reject San Francisco firm Bitwise’s Bitcoin ETF proposal last October.

“The Commission concludes that NYSE Arca has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), and, in particular, the requirement that the rules of a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest,” the agency wrote in its rejection.

Commissioner Hester Peirce, also known as “Crypto Mom” among crypto enthusiasts, dissented from her colleagues, stating that the agency was applying “heightened standards” for Bitcoin ETF products. While the points raised in Peirce’s dissent may be valid, they are not likely to cause reconsideration of the rejection. She has also dissented with her colleagues in past decisions involving Bitcoin ETFs.

Is this the End of Road for Bitcoin ETFs?

The latest rejection means that the SEC does not have any more Bitcoin ETF proposals in its docket. Bitwise withdrew its bitcoin ETF proposal in January this year while the other high-profile contender, VanEck SolidX’s proposal for a bitcoin ETF, was withdrawn from consideration in August 2019.

If history is any indication, all is not lost. There is precedence for the SEC’s repeated rejections before acquiescence. ETF proposals for gold, a commodity that Bitcoin is supposed to resemble, were rejected by the SEC several times, before the first gold ETF debuted in 2004.

Interestingly enough, the SEC brought up similar points regarding information sharing agreements between spot trading exchanges in its rejection of gold ETFs.

Back then, most gold trading occurred on spot OTC exchanges in London, New York, and Zurich and prices were (as they are now) set by the London Bullion Market Association (LBMA). When it approved the first ETF, the SEC admitted that it was “not possible to enter information sharing agreement with the OTC gold market.”

But the federal agency cited the “unique liquidity and depth” of the market for gold in its final approval. (Monthly average daily volume for gold trading in 2003, the year before the agency’s first approval of a gold ETF, ranged from a high of 19 million to a low of 13.6 million troy ounces). The SEC was also satisfied with the Memorandum of Understanding (MoU) with the NYMEX for sharing of data relating to gold trading.

Unlike gold, bitcoin is not a physical product. Trading volume is the only measurement metric that can be applied to it. Per numerous reports, however, that volume is reportedly fake. While the crypto ecosystem has improved considerably since the initial ETF application, the liquidity and depth required for an ETF approval aren’t up to the mark yet. Attempts by the Winklevoss brothers-backed Gemini exchange to establish a self-regulatory organization (SRO) for crypto exchanges have failed to garner support among top exchanges. In other words, it might be some time before a Bitcoin ETF makes its debut in the markets.

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