As New Crypto ETFs Continue to Spread Across Europe, the SEC Stands Fast in Opposition

In news that’s going to provoke a certain amount of jealousy in American would-be crypto investors, three more exchange traded funds (ETFs) have been approved on the French and Dutch Euronext exchanges.

For European investors who want exposure to bitcoin and other cryptocurrencies without needing to buy and custody in themselves, it’s probably kind of ho-hum.

That’s not to say more choices aren’t a good thing, or that the details of Swiss asset-management firm Valour Inc.’s three new options — particularly as they track top “Ethereum-killer” blockchains Cardano (ADA), Polkadot (DOT) and Solana (SOL) — aren’t of interest.

It’s just that Europeans, like Canadians and investors in a number of other countries, have other choices in crypto ETFs. In fact, WisdomTree’s ADA, DOT and SOL ETFs launched on a pair of Swiss exchanges last week, on March 29. There is about $7.3 billion invested in European ETFs, Bloomberg said on April 4.

However, in America, there’s no such luck — at least when it comes to spot bitcoin ETFs which hold the actual cryptocurrencies. The U.S. Securities and Exchange Commission (SEC) has approved a number of bitcoin futures ETFs, which let investors trade derivatives contracts based on bitcoin — just not the actual bitcoin they are based on.

The problem comes down to market manipulation, something the SEC seems to think is a bigger problem than many of its fellow securities regulators.

Frustration

It’s something that has frustrated would-be bitcoin ETF managers, which include mainstream financial firms like Fidelity and the NYSE, for years. This is particularly true for those who hoped President Joe Biden’s new SEC Chairman, Gary Gensler, would shift the agency’s position.

On April 2, it rejected Ark 21Shares, a joint proposal by Cathie Wood’s Ark Investment Management and investment firm 21Shares. That was only four days after Grayscale Investments LLC CEO Michael Sonnenshein told Bloomberg he might sue the regulator if it turned down his ETF.

Grayscale’s desire for a Bitcoin ETF is particularly strong. Its Grayscale Bitcoin Trust (GBTC) sells shares in a company that does nothing but hold BTC, but it also has a number of other crypto trusts. Once the only game in town for institutional investors, GBTC’s share price went from a substantial premium over the value of its bitcoins to a substantial deficit. That happened around the time Canada’s first two bitcoin ETFs were approved.

It isn’t a lost cause. While the SEC has continued to reject its long-delayed backlog of spot bitcoin ETFs, it did throw Grayscale a bone, requesting public comment on the proposal on Feb. 7.

Read more: SEC’s Request Suggests that Opposition to Bitcoin ETF May Be Fading

Sonnenshein is not without allies in the SEC. Commissioner Hester Peirce began issuing blistering criticism of the agency’s crypto exchange traded product policy back in 2018, when it rejected a proposal by the Genesis exchange.

Peirce, whose support for that and other digital asset projects earned her the nickname “Crypto Mom” in the industry, told Barron’s later that month, on Feb. 25, “I wrote my first dissent over the denial of a Bitcoin ETF four years ago, and I’m still amazed that there hasn’t been an approval yet.”

Manipulation

The basic problem, according to the SEC, is that the bitcoin market remains susceptible to manipulation — a recent hack of a decentralized finance project, while involving smaller cryptocurrency, demonstrated the basic problem that big trades can affect prices enough for big problems.

See also: Lending Protocol Inverse Finance Loses $15.6M in Crypto Following Hack

What’s lacking, the agency has said in its many rejections, is a “surveillance sharing agreement” with another major — “significant” — regulated exchange. The idea is that a bad actor would have to manipulate both markets, making the manipulation easier to spot.

“Listing exchanges have also attempted to demonstrate that other means besides surveillance-sharing agreements will be sufficient to prevent fraudulent and manipulative acts and practices, including that the bitcoin market as a whole or the relevant underlying bitcoin market is ‘uniquely’ and ‘inherently’ resistant to fraud and manipulation,” the SEC said in a Jan. 20 rejection.

“Such resistance to fraud and manipulation, however, must be novel and beyond those protections that exist in traditional commodity markets or equity markets for which the Commission has long required surveillance-sharing agreements in the context of listing derivative securities products,” the agency continued. “No listing exchange has satisfied its burden to make such demonstration.”