It’s official: yesterday the SEC rejected WisdomTree’s proposal to issue an ETF on spot Bitcoin.
SEC doesn’t approve WisdomTree’s ETF
In the lengthy document (69 pages) in which the SEC orders disapproval of the proposal, it says the agency does not believe the proposal is consistent with the requirements of the Exchange Act, and in particular Section 6(b)(5) of that Act.
The Securities Exchange Act of 1934 is the US federal law that established the Securities and Exchange Commission (SEC) itself.
Section 6(b)(5), or to be precise, subsection 5 of section b of Chapter 78f of Title 15 of the U.S. Legal Code, states:
“exchange’s rules are designed to prevent fraudulent and manipulative acts and practices…”
Thus, the bottom line is still the same point that has so far not allowed the SEC to approve any ETFs in the US based directly on cryptocurrencies, namely the risk of market manipulation.
What has always been surprising, however, is the fact that ETFs based on cryptocurrency futures contracts have been approved, as though these did not run similar manipulation risks.
There are a couple of important distinctions to be made in this regard though.
The difference with crypto derivative-based ETFs
The first, which is the most important one, is that according to what the SEC has always claimed, different laws apply to ETFs based directly on token custody than those based on derivatives. So they simply have to comply with different rules.
By this logic, the rules for spot ETFs would be more stringent, while those for futures-based ETFs would be less so.
However, it is worth noting that in neighboring Canada this distinction has not been made, and indeed spot Bitcoin ETFs have already been approved along with those on futures contracts. Canada evidently has different laws.
The second relates to the existence in the US of two separate agencies overseeing the financial markets, namely the SEC, which oversees the security market, and the Commodity Futures Trading Commission (CFTC), which oversees the futures market itself.
Well, the CFTC approved Bitcoin futures back in December 2017, thus taking responsibility for approving derivative products based on spot Bitcoin for the US financial markets.
When the SEC was asked to approve an ETF based on futures already approved by the CFTC, the agency in charge of screening all ETF applications deemed them compliant with all regulations, perhaps precisely because spot Bitcoin futures had been previously approved by the CFTC.
To be fair, the CFTC in the US seems much more open-minded about cryptocurrencies than the SEC, in part because it does not need to police whether some of them should or should not be considered securities.
Indeed, it is the SEC that has the task of determining whether some cryptocurrencies are securities (Bitcoin is not), and not the CFTC.
The responsibilities of the SEC and CFTC concerning the crypto market
Since Bitcoin is now commonly considered a commodity, it is no longer the SEC’s job to deal with it, but rather that of the CFTC itself. Indeed, Senators Lummis and Gillibrand’s new cryptocurrency bill would impose precisely on the CFTC the oversight of cryptocurrency markets that are considered commodities, and their derivative products, while leaving it to the SEC to evaluate proposed ETFs.
ETFs (Exchange-Traded Funds) are indeed considered to be securities by definition, thus surely the responsibility of the SEC.
Thus on the one hand there is the CFTC, which is quite open with respect to cryptocurrencies that are considered commodities, such as BTC, and on their derivative products. Given that it is precisely the agency in charge of overseeing these markets, this means that it is not putting any particular obstacles in the way of this.
By contrast, there is the SEC on the other side, which does not deal directly with commodities or commodity derivatives, but is concerned with securities and in particular ETFs.
The SEC has already made it very explicitly clear several times that it considers many cryptocurrencies to be securities, with the exception of Bitcoin and the other payment tokens, and since these would be unregistered securities and not lawfully sellable in the US, it has a rather contrary attitude.
That said, Bitcoin is not a security, but this attitude of the SEC is likely to affect its decisions about ETFs as well.
And so an ETF based on a CFTC-approved derivative product is approved by the SEC, even if the derivative in turn is based on Bitcoin’s spot market, while an ETF based on an unregulated financial product, such as Bitcoin, is not approved. If there are ETFs on crypto derivatives in the U.S., it is only thanks to the CFTC, which approved them long ago.
It is worth mentioning that there seems to be no doubt about the CFTC’s actions in this regard, partly because time has proven it right so far. What is surprising, however, is the SEC’s actions, which agrees to approve crypto ETFs based on products previously approved by the CFTC, but does not agree to approve crypto ETFs based directly on the real underlying.