It was one the most anticipated news of the month. Gemini’s request to list an Exchange Traded Fund excited many in the industry and bitcoin surged to levels never seen in the last two months. But when it finally came, it left many disappointed. The verdict was more or less the same as another one given in 2017. Coincidentally, it was the same exchange Gemini that had made the application.
In a nutshell, the Securities and Exchange Commission does not believe that investors will be adequately protected from fraud and manipulation in the nascent market.
In the 92 page document detailing how the decision was reached, the SEC says “The Commission thus cannot, on the record before it, conclude that bitcoin markets are uniquely resistant to manipulation.”
Prices have dropped nearly 4% in the wake of the announcement to trade below $8000. The rest of the market which typically follows the price action of bitcoin has similarly retreated.
Fears about market manipulation are not new. Various studies have sought to point this out although none has been conclusive. A scholar has recently claimed that some transactions are artificial although holes have been poked into the study.
Another claim involves Tether, a stablecoin and that it was used to artificially increase the value on bitcoin on Bitfinex. Again, there has been no definitive proof that this happened.
Regarding Bitcoin ETF’s, there are a number of similar applications pending with the SEC and it is only fair to assume they will meet the same fate – at least in the short term.
The speculation around this event alone is thought to have provided as much as 40% boost in value this month alone.
Gatekeeper for innovation
The dissenting commissioner Hester Pierce believes that the move to reject the application will prevent the industry from greater institutionalisation. With a market cap of about $140 billion, bitcoin is understandably not as robust compared to say the forex market. Allowing the ETF would have helped bring more capital from institutional investors and help safeguard the market against manipulation.
In fact, Pierce wrote that “more institutional participation would ameliorate many of the commission’s concerns.”
Pierce argues that the commission based its decision not on the ETP shares to be listed on the exchange but on the underlying bitcoin spot market.
The Winklevoss twins who own Gemini are not giving up yet on their dream of a bitcoin ETF.
“Despite today’s ruling, we look forward to continuing to work with the SEC and remain deeply committed to bringing a regulated bitcoin ETF to market and building the future of money,” Cameron Winklevoss wrote after the decision was made.
The application was rejected largely because the commissioners found it to be inconsistent with the Exchange Act Section 6(b)(5) which requires securities rules to be “designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”
For now, hopes of new money pouring in have been stalled. We await to see if there is a change of heart with the other applications.