US SEC Chairman: Bitcoin ETF Could Become a Reality

ETF is usually called an exchange-traded open-end index fund, or Exchange Traded Fund (ETF for short). It is an open-end fund that is traded on an exchange and has variable fund shares. It is a very popular financial derivative in the traditional financial market. For a growing investment market like Bitcoin, the future market development space for ETF is very huge. The so-called Bitcoin ETF is a very common investment channel. It is the management of special assets that track the Bitcoin price index. The biggest advantage of ETF is that it allows investors to hold digital currencies in a simpler way without having to go through the complicated process of purchasing a single or multiple currencies. Buying a Bitcoin ETF is equivalent to indirectly investing in Bitcoin. In addition, since ETF holders do not need to hold Bitcoin itself, there is no need to worry about the storage and security of digital assets.

1. Bitcoin ETF Application Process

On June 30, 2016, Bats BZX Exchange submitted a rule change application to the SEC that would enable it to trade shares of the Winklevoss Bitcoin Trust. If approved, the Winklevoss twins' ETF would become the first licensed Bitcoin BTF to enter a fully regulated stock exchange. This would allow ordinary investors to directly access Bitcoin without actually holding cryptocurrencies or having to go through the trouble of learning how to operate a cryptocurrency exchange or wallet.

Undoubtedly, this is a big step towards the mainstreaming of cryptocurrencies. However, after considerable deliberation, the SEC rejected the application for rule changes. On March 10, 2017, the agency issued a statement explaining the reasons behind the decision, the main reason being to prevent market manipulation and fraud.

Just two weeks after the decision, the SEC rejected a similar application from NYSE Arca, which is owned by Intercontinental Exchange, to launch the SolidX Bitcoin Trust ETF. In a new statement, the agency largely repeated its previous content, claiming that "the application does not comply with Section 6(b)(5) of the Exchange Act, which requires national securities exchanges to adopt rules to prevent fraud and market manipulation."

The above deeds fully demonstrate that 2017 is by no means a friendly year for Bitcoin ETFs, and exchanges should also dispel the SEC's approval of an ETF application as soon as possible. In fact, in addition to SolidX and Winklevoss, Barry Silbert's Grayscale Investments also registered an ETF application with the SEC in January 2017. Of course, the results of this application were not better than those of its competitors. The decision on the application was postponed to March 22 of that year, and the three public comments on the application were all negative. After that, the company withdrew its ETF application in September of the same year, citing the lack of "regulatory progress" in the crypto market as the main reason.

The public provided a number of additional comments to the SEC between March and September 2017. Although the total number of comments was only 21, some of them did provide insight into Grayscale Investments’ application and revealed why the company’s ETF application was unlikely to be approved at the time.

2. Bitcoin ETF may soon become a reality

U.S. Securities and Exchange Commission Chairman Gary Gensler hinted at a path to approving a bitcoin ETF, saying an ETF that complies with the SEC’s strict rules for mutual funds would provide the necessary protections for investors.

Under Gensler and former chairman Jay Clayton, the SEC has repeatedly refused to approve cryptocurrency ETFs, citing concerns about transparency and manipulation risks in the bitcoin spot market.

Most pending ETF applications are filed under a 1930s law that allows stock exchanges to list products. Gensler hinted that he would like to see an ETF filed under 1940 mutual fund regulations. The distinction is more than academic. The mutual fund law provides far stronger investor protections and requires fund boards to closely monitor the investments, lawyers say.

At least six Bitcoin ETF applications have been submitted to the SEC. Gensler said in his speech that although he is interested in blockchain technology and believes that cryptocurrencies have potential value, he plans to actively protect investors in the field.

Gensler echoed these concerns in an exclusive interview with Bloomberg Businessweek, in which he said that when developing a regulatory framework, there will be no compromise on investor protection.

3. Conclusion

The successful application of Bitcoin ETF will lower the threshold of Bitcoin trading, bring a large amount of funds to the Bitcoin trading market, accelerate the development of the cryptocurrency industry, and promote asset custody to a certain extent. It is also equivalent to telling the public that the government has recognized Bitcoin as a legal asset class, changing people's overall view of the regulatory risks of cryptocurrencies, which will accelerate the public's acceptance of cryptocurrencies represented by Bitcoin.