The US Securities and Exchange Commission (SEC) has rejected a proposal to launch a spot Bitcoin exchange-traded fund (ETF) that would actively track the price of BTC. Cboe BZX exchange had applied back in March; however, the SEC stated that not enough was done to protect investors from fraudulent trading.
The Commission says the proposal must be designed to prevent fraudulent and manipulative acts and practices, and VanEck did not adequately prove that it can protect investors.
“It is essential for an exchange listing a derivative securities product to enter into a surveillance-sharing agreement with markets trading the underlying assets for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules,” said in the SEC statement.
SEC chair Gary Gensler has approved the first time two Bitcoin futures ETFs in late October. The ProShares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF), began trading in late October and led to a rally in the price of the leading cryptocurrency. The ProShares BITO ETF also recorded a record-shattering influx of capital and a trading volume of around $1 billion.
Gensler has also made peace with futures-based ETF because futures trade on well-regulated exchanges, with the Commodity Futures Trading Commission overseeing activities on a federal level.
The SEC chair has expressed reluctance to approve a spot Bitcoin ETF in the absence of legislation defining which regulatory agencies have control over areas of the crypto industry, such as exchanges. A spot Bitcoin ETF would track the price of Bitcoin directly, without users having to own the cryptocurrency, and manage the complicated process of setting up wallets, etc. The SEC has expressed its concern that a product based on the spot price of Bitcoin could be in contravention of securities rules because the market is vulnerable to abuse.
An ETF tracks the performance of an underlying asset or asset group and exposes investors to these assets, even though the investors don’t own the assets themselves. A futures ETF is one where a contract that represents the future value of a cryptocurrency is bought or sold. The contract contains an agreement to buy or sell cryptocurrency at a future date. Futures are thus protected from cryptocurrencies’ infamous volatility. If people believe the price of bitcoin will rise, the price of these futures contracts will be high. The value of a Bitcoin futures ETF is determined by the movement of the price of the futures contracts. These futures contracts are traded on the Chicago Mercantile Exchange.
Investors believe that Futures-based ETFs are not as favorable or effective as an ETF that can directly track Bitcoin. However, there is consensus that they are an important stepping stone to achieving an ETF to track Bitcoin directly. However, it could be a while since that can become a reality.
Applications for futures-based ETFs have seen significant growth during the year, especially after Securities and Exchange Commission Chairman Gary Gensler stated that the SEC would be open to Futures-based ETFs.
The SEC’s decision on VanEck’s spot Bitcoin ETF was no surprise for experts in the ETF industry. Most of them previously stated that no physically-backed cryptocurrency ETFs would become available in the country until the SEC finds a way of properly regulating the cryptocurrency trading industry.
Crypto experts suggest that the main reason for the disapproval of the spot-based Bitcoin ETF still remains the same: the inability to fully control the decentralized cryptocurrency market. But, in addition to it, the SEC gives a hint: there is no point in listing such a product at this time since the existing futures-backed products are perfectly doing their part, according to their own research. Following the rejection, the price of Bitcoin has since retraced to $65,325 at the time of writing.