The U.S. Securities and Exchange Commission (SEC) rejected a Bitcoin Spot ETF application filed by Fidelity Investments in March 2021.
Still no Bitcoin Spot ETF
Bitcoin ETFs are a funny old thing.
They seem like a big deal, but really they are not as important as people make them out to be. Then again, the approval or rejection of an ETF generates massive news, which usually leads to a market reaction.
Evidence of that is the approval of the first Australian crypto ETF, which broke trading records on its first day. It is expected to result in massive capital inflows in the crypto space, but that alone was not enough to prevent the correction in the last two months.
Traders who were hopeful that the approval of a Spot ETF would kick prices into a higher gear were now disappointed as well. Unsurprisingly, the SEC rejected Fidelity Investment’s application for an ETF. The application had sought to propose a rule change that would allow the listing and trading of the Wise Origin Bitcoin Trust.
According to Fidelity, this would have been to investors’ advantage. They would be able to access the fund through traditional brokerage accounts without the usual barriers to entry to interact with Bitcoin. The SEC disagreed with that nation, rejecting this rule change and expressing concerns about fraud, manipulation, and investor protection. Its reasoning read:
“This order disapproves of the proposed rule change. The Commission concludes that BZX 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 SEC also stressed:
“…an exchange that lists bitcoin-based exchange-traded products (“ETPs”) can meet its obligations under Exchange Act Section 6(b)(5) by demonstrating that the exchange has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets.”
Surveillance-sharing agreements
If you have never heard of surveillance-sharing agreements, you are not alone.
They provide information on customer identity and market trading activity and allow exchanges to “detect, investigate, and deter fraud and market manipulation.” The SEC often quotes these agreements in its decisions around approving or rejecting commodity exchange-traded products, as has been the case for the decisions on the Valkyrie, Kryptoin, and VanEck ETFs.
Quo vadis, Spot ETFs?
That leaves market participants wondering whether a Bitcoin Spot ETF will ever become reality.
With BlackRock’s ETF application from January 21 pending, Bitcoin advocates are hoping that the asset management firm’s reputation sways the opinion of the SEC in favour of a Spot ETF. However, if anything, the SEC has been consistent in its approach and has continued to reject Spot ETFs based on the same arguments. For now, it seems that ETFs not leaving a lasting impression on the market may not be such a bad thing after all.
