For years, owners of cryptocurrencies have been tantalized by the promise of one particular event: the incorporation of their currencies into exchange-traded funds (ETFs). Conventional wisdom holds that an ETF listing would legitimize cryptocurrencies and attract dollars from institutional and other mainstream investors, which currently lack attractive options for gaining exposure to them. This, of course, would raise prices. For crypto speculators, then, an ETF listing is something of a Holy Grail. As of now, however, it remains frustratingly out of reach—and a new decision by the SEC only removes it further from the industry’s grasp.
Yesterday, the SEC denied applications for nine separate bitcoin-linked ETFs. In three separate orders, the Commission rejected two proposed ETF products from ProShares, two from GraniteShares, and five from Direxion. All of the proposed ETFs would have been linked to the bitcoin futures market, as opposed to the price of bitcoin itself. In turning them away, the SEC noted concern about the relatively small size of the bitcoin futures market. It also stated that the applications did not make a convincing case that the ETFs were “designed to prevent fraudulent and manipulative acts and practices.”
We’ve heard this tune from the SEC before. This summer, the most prominent faces of the ETF movement – the Winklevoss twins – suffered a big setback at the agency, where they were appealing a rejection of their proposal to list a bitcoin-based ETF on the Chicago Board Options Exchange. In late July, however, the SEC affirmed that decision, signaling its continued skepticism towards the bitcoin market. The SEC’s opinion suggested that market was at risk of manipulation, sounding many of the same notes that yesterday’s opinions did.
It hasn’t been all bad news for the crypto ETF movement, though. The Commodities Futures Trading Commission did authorize trading in bitcoin futures, which some viewed as a necessary step on the way to ETFs. Also, a number of blockchain-based ETFs have launched this year, which may also help in getting regulators comfortable with the underlying technology. Even the SEC’s decision on the Winklevosses’ proposal was not entirely one-sided. Republican Commissioner Hester Peirce dissented from the majority (in a 3-1 vote), arguing that greater institutional investment would “ameliorate many of the Commission’s concerns with the bitcoin market.”
This has been more than enough to keep the push for an ETF going. The Winklevoss twins, for their part, are taking an inventive new approach. On Monday, the Wall Street Journal reported that the twins have created the cryptocurrency industry’s first self-regulatory organization, the Virtual Commodity Association, and announced its initial members. The strategy appears obvious: to use the self-regulatory body to provide the standards and transparency that the SEC has found lacking in the bitcoin market in the course of rejecting bitcoin-linked ETFs.
Also, the SEC has yet to make a decision on a so-called “physical” ETF, which ties its value directly to bitcoin. That application, from VanEck and SolidX, may have the most optimism surrounding it. The SEC has delayed until September its ruling on their proposal, which received an unusual level of support from the crypto community during its comment period.
If the SEC rejects it, we can be fairly certain that crypto investors will keep reaching for the Holy Grail anyway.