The cryptocurrency market is booming day in and day out. With more and more interest being developed the need for a crypto-linked exchange traded-fund (ETF) is growing exponentially. With proposals coming in from all directions, the United States Securities and Exchange Commission (SEC) is holding back from approving the establishment of such an ETF, but what does it signify for the market? What repercussions could follow if a crypto-linked ETF does not get established?
The major reason behind this drive for getting a bitcoin exchange traded-fund established is institutional interest and security. There is a lot of institutional money sitting on the sidelines as it has no framework or platform to enter the market safely. If an ETF gets established, this money could start circulating in the market improving the overall stability. Institutional interest is the main driving force behind this demand of establishing a bitcoin ETF. So, if a bitcoin ETF gets established, the market is expected to grow an scale never seen before. But delaying this might just be harmful for the market as well.
The world of cryptocurrency is rife with illegal and fraudulent practices. Due to this, the institutional investors have always held back from investing in this market of great opportunities. Without an ETF there is no proper framework for investors to participate in this game of cryptos. Nobody wants to enter a void with no entrance or exit doors specified.
Up until now, many proposals have been put forward by different organizations in front of the SEC with the majority of them getting denied. In all the concerns raised by the SEC, the major issue of lack of security and the prevalence of illegal and fraudulent activities across the crypto space stands out.
In the recent rejection that was faced by the proposal of Winklvoss twins backed by Bats BZX, it was stated by the SEC:
“Although the Commission is disapproving this proposed rule change, the Commission emphasizes that its disapproval does not rest on an evaluation of whether bitcoin or blockchain technology more generally has utility or value as an innovation or an investment. Rather, the Commission is disapproving this proposed rule change because as discussed in detail below, BZX has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices.”
With a common ground provided for all the institutional investors, the crypto market could be in for a boost. The proposals for establishing crypto-linked ETF have also been put forward by VanEck and Bitwise. Although most of such proposals have been denied by the SEC in the past, but the proposal put forward by VanEck seems to be the one that might get approved.
The concerns that have been raised by the SEC in the past regarding a bitcoin ETF seem to have been well handled by VanEck. Recently, a letter was also published by VanEck for the SEC in which the concerns regarding valuation, liquidity, custody, arbitrage and potential manipulation and risks were handled by the firm. Regarding the concern of manipulation in the market, the letter states that:
However, we believe that all of these concerns are reduced with the introduction of a regulated, U.S. exchange-traded product such as our proposed ETF. While one cannot rule out manipulation in the underlying spot market, we believe that, due to the diversified ownership and volume oftrading, the market does not have major, structural vulnerabilities. Therefore, the Commission’s increased enforcement and regulatory actions can reduce the number of bad actors in a basically sound market. A regulated fund is a natural extension of this.
In the hindsight of all the developments being made and interests getting developed, the SEC has recently postponed its decision regarding the establishment of a bitcoin ETF until 30th Sepetember.
Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,6 designates September 30, 2018, as the date by which the Commission shall either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change (File No. SRCboeBZX-2018-040).
Another reason for this delay is also the nature that the bitcoin market possesses. Being unregulated, it presents a lot of threats to the security fabric of the market. It was stated by the SEC that:
The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated.
In a nutshell, the need for an ETF is strongly driven by all the institutional interest that has been developed in the recent past but there are still some obstacles that need to be crossed. As soon as an ETF gets established the bitcoin market is expected to boom on a global scale. If not, we might see the crypto market plummeting down to a new low. But in the backdrop of all the demands, the establishment of ETF seems to be inevitable.