The price of bitcoin sank 5 per cent after regulators deferred approvals of the first US exchange traded funds that invest directly in the cryptocurrency, damping investors hopes for a speedy route to the world’s largest capital market.
The US Securities and Exchange Commission said late on Thursday in a series of filings that it needed more time to consider seven bitcoin ETF applications, including one from BlackRock, the world’s largest asset manager.
The fall in the price of bitcoin meant the token had unwound most of the gains it had made after a Washington court this week ruled the agency had been wrong to reject an application by asset manager Grayscale to turn its flagship vehicle, Grayscale Bitcoin Trust, into an ETF.
The court ruling has put pressure on the SEC to relent from a decade-long policy of refusing ETFs based directly on the controversial token. Crypto advocates have long called for a spot bitcoin ETF, arguing it offers consumers a cheap and safe way to trade the coin, instead of buying it directly from unregulated crypto exchanges.
Demand for a spot bitcoin ETF has grown this year and more traditional players have attempted to break into the sector. Fidelity, WisdomTree, Invesco Galaxy, VanEck, Bitwise and Valkyrie Digital Assets also had their applications for a spot bitcoin ETF delayed on Thursday.
But the regulator has argued that it cannot offer investors reassurance that the bitcoin market is not prone to being manipulated. Gary Gensler, chair of the SEC, in July called the crypto market “rife with fraud, rife with hucksters”. Even so, the SEC has approved bitcoin futures ETFs, which track the price of futures linked to the cryptocurrency.
The Washington court has forced the SEC to review its approach to bitcoin ETFs. It has 45 days to decide whether to abide by the court decision, ask a court to review it or make a direct appeal. The SEC said it was “reviewing the court’s decision to determine next steps”. The regulator is expected to make its decisions on spot bitcoin ETFs in mid-October.
“We believe it is quite feasible that the SEC will craft alternative arguments to justify continued rejections of spot bitcoin ETF applications based on concerns specific to the spot bitcoin market,” said Mark Palmer, an analyst at Berenberg Capital Markets.
He pointed out that the involvement of Coinbase in the ETF filings further complicated the issue. Coinbase has proposed surveillance-sharing agreements with the regulated exchanges hosting the potential ETF listings, CBOE Global Markets and Nasdaq. Earlier this year the regulator sued Coinbase for allegedly violating US securities laws.
“We would not be surprised if [Coinbase’s] potential involvement in those ETFs were to serve as part of the SEC’s reconfigured arguments for rejecting the applications,” added Palmer.
However, lawyers suggest a fresh round of rejections citing new concerns will be a challenge for the SEC, which has long justified its opposition to these products on market manipulation grounds.
“In theory, they could try to oppose these applications on other grounds but for years they’ve put all their eggs in the basket of there not being a sufficiently regulated market to trade cryptocurrencies, and the court resoundingly rejected the SEC’s argument for that,” said Jeremy Senderowicz of law firm Vedder Price.
