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Government Delays Keep Bitcoin ETF Proposals in Play

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After rejecting several proposals for the first Bitcoin ETF earlier this year, the Securities and Exchange Commission continues to seek more information on how exchanges can address fraud and manipulation concerns in the underlying Bitcoin markets.

Cboe BZX Exchange filed a rule change proposal on Jan. 5, 2018, with the Securities and Exchange Commission to list and trade shares of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF issued by the GraniteShares ETP Trust. The commission indicated in February and again in June that it needed more time to consider the proposal.

In August, the commission decided that the exchange had failed to demonstrate, as required by the Exchange Act and the commission’s Rules of Practice, that its rules would prevent fraudulent and manipulative acts. The SEC also said the exchange offered no record evidence that Bitcoin futures markets are markets of significant size.

“That failure is critical,” the commission wrote, adding that surveillance sharing with a regulated market of significant size would be necessary to prevent fraud and manipulation, because the exchange hadn’t established that other means would do that.

Other proposals for a Bitcoin ETF were filed with the commission, including one from Bats BZX Exchange to list and trade shares of the Winklevoss Bitcoin Trust. This was a second attempt to secure approval for a Bitcoin ETF by Tyler and Cameron Winklevoss, founders of the Gemini Bitcoin Trust. In its decision, the SEC similarly stated fraud and price manipulation concerns.

Another rule change proposal, filed on June 20, 2018 by Cboe BZX Exchange, to list and trade shares of SolidX Bitcoin Shares issued by the VanEck SolidX Bitcoin Trust, is still under consideration by the SEC. The commission has twice requested more time to form a decision, which left some market participants hopeful that the SolidX Bitcoin might sufficiently respond to commission concerns.

Both VanEck and SolidX submitted previous proposals for ETF that were either rejected or pulled. In their latest attempt, they changed several elements, including creating a physically backed ETF and a focus on insurance to alleviate operational risk.

In addition to its security system, the trust would maintain comprehensive insurance coverage underwritten by various carriers to protect investors against Bitcoin loss or theft. It remains unclear whether the SEC, in order to approve a Bitcoin ETF, will require sponsors to have a surveillance-sharing agreement with a regulated market of significant size and data to fully assuage its concerns over manipulation in the underlying exchanges.

In its proposal, VanEck and SolidX said they “may obtain information” about Bitcoin transactions, trades, and market data from Bitcoin exchanges they entered into a surveillance-sharing agreement with. The VanEck/SolidX exchange noted it entered into a comprehensive surveillance-sharing agreement with the Gemini Exchange. The SEC highlighted 18 key issues and will accept additional comments from the public until Nov. 5, 2018. One of the issues is whether the Gemini Exchange is a market of significant size.

The SEC can impose several more extensions, which could result in a final decision in early 2019, said Jake Chervinsky, a Washington-based lawyer at Kobre & Kim. ETF backers remain optimistic that the SEC will approve the first Bitcoin ETF in 2019.

By, Bloomberg BNA


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