Bitcoin

The SEC Sinks Bitcoin ETF Dreams (For A Bit, Coin For Now)

By rejecting a rule change proposal, the SEC has nixed bitcoin’s debut as an exchange-traded fund, at least for now. And with the currency as a standalone entity, will virtual luster fade?

Is a bitcoin ETF DOA? If not, how about: ETF, ETA?

News Friday (March 10) that the Securities and Exchange Commission (SEC) nixed a proposed rule change that could have given rise, sooner rather than later, to a bitcoin exchange-traded fund (ETF) took the wind out of the proverbial sales (pun intended) or the proverbial luster off the virtual currency for a spell. 

Maybe a very short spell.

To recap, the New York Stock Exchange (NYSE) back in the beginning of 2017 filed a proposal for a rule change that would have paved the way for the Winklevoss twins’ Bitcoin Trust to trade on the NYSE ETF exchange, known as Arca. 

The short answer just handed down: no. 

The reason behind that resounding rejection? There’s always been, and still is, a lack of regulation in the land of bitcoin, with the potential for fraud a red light for the Commission.

In the ruling itself, the SEC noted that there still remains some degree to which bitcoin “is subject to manipulation,” and there is at least some question as to how wide-ranging that degree of manipulation might be. 

Regulation would “help answer that question” for a cryptocurrency that marks “early stages of its development,” as the ruling said.

In other words, without definitive pricing mechanisms and tracking in place, a truly fluid market has yet to emerge with the transparency that investors need.  

Broadly speaking, ETFs track assets or commodities and trade on markets just as stocks do. But if the pricing is not solid and the trust is not there, then the whole premise may as well be built on a quicksand foundation.  

As has been reported, in this case by Bloomberg, the price of bitcoin promptly got slammed by as much as 18 percent, to $978.76, before recovering to lose “only” 8 percent on the day, tied to the news that the Winklevoss Bitcoin Trust would be trading on the Bats BZX Exchange where oversight would not apparently have been satisfactory.

The twins themselves, Tyler and Cameron, said in a statement that they “remain optimistic and committed” to bringing an ETF to market eventually, and said they will remain in dialogue with the SEC, noting that the movement toward an ETF began as long as four years ago.

This may imply tough sledding for bitcoin to emerge from its current designation of cryptocurrency as it sought, and has been seeking and surely will seek, to make the leap to an asset and investment vehicle (governed by bitcoin’s price, naturally). 

The ETF might have been an investment vehicle with some liquidity and attractiveness to investors, who would have not needed to register personal digital wallets to hold bitcoin. 

For the twins, it’s not quite back to the drawing board, but the pencils are going to have to be sharpened again and some new fresh paper laid out in order to sketch new plans.

Here’s what else lurks in the wings, which may make some progress as bitcoin looks for and perhaps lurches toward a wider embrace on Wall Street and main street. 

There are two proposals that seek ETF designation. One is Grayscale Investment’s Bitcoin Investment Trust, filed with the SEC at the beginning of the year, and the other is the SolidX Bitcoin Trust, filed in the middle of last year. Some observers have noted that these proposed ETFs have pegged their own pricing mechanism to indexes different from the one the Winklevoss ETF would have used.

But would that mean much? The sweeping pronouncements by the SEC that the markets are too wild and woolly (OK, we are paraphrasing here) indicate that it is more than pricing that is at issue here. 

Breaches that have been seen in the past also hint at vulnerabilities that make regulation paramount. Losses may reverberate even as the coins themselves disappear into the ether (Mt. Gox, anyone?). The Latin phrase is “caveat emptor,” but what happens if lack of safeguards render virtual wallets of the emptors empty?

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