24/7 Wall St.

The U.S. Securities and Exchange Commission (SEC) late Wednesday rejected nine different applications from firms seeking approval to create bitcoin-based exchange-traded funds (ETFs). This marks the second time in less than a month that the agency has denied proposals to establish crypto-backed ETFs.

In late July, the SEC denied approval (for the second time in four years) to Cameron and Tyler Winklevoss for a bitcoin-based ETF that would have allowed the twin brothers to list the fund on the Cboe Global Market. Yesterday’s rejected proposals would have listed on the Cboe, in addition to listing on the NYSE Arca exchange.

The NYSE Arca had filed to offer seven funds:

• ProShares Bitcoin ETF
• ProShares Short Bitcoin ETF
• Direxion Daily Bitcoin Bear 1X Shares (“1X Bear Fund”)
• Direxion Daily Bitcoin 1.25X Bull Shares (“1.25X Bull Fund”)
• Direxion Daily Bitcoin 1.5X Bull Shares (“1.5X Bull Fund”)
• Direxion Daily Bitcoin 2X Bull Shares (“2X Bull Fund”)
• Direxion Daily Bitcoin 2X Bear Shares (“2X Bear Fund”)

The Cboe had filed to offer two funds:

• GraniteShares Bitcoin ETF (“Long Fund”)
• GraniteShares Short Bitcoin ETF (“Short Fund”)

In all three of its orders rejecting the proposed rule changes from the Cboe and NYSE Arca to permit ETF trading, the SEC offers the following reasoning:

[T]he Commission must disapprove a proposed rule change filed by a national securities exchange if it does not find that the proposed rule change is consistent with the applicable requirements of the Exchange Act—including the requirement under Section 6(b)(5) that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices.

[E]ven if a proposed rule change would provide certain benefits to investors and the markets, the proposed rule change may still fail to meet other requirements under the Exchange Act. For the reasons discussed above, the Exchange has not met its burden of demonstrating an adequate basis in the record for the Commission to find that the proposal is consistent with Exchange Act Section 6(b)(5), and, accordingly, the Commission must disapprove the proposal.

Both the Cboe and the NYSE Arca failed to persuade the SEC that safeguards against fraud and manipulation are in place.

The Cboe also was scolded for filing an amended proposal on August 21, months after the May deadline the SEC had set for rebuttal comments. After noting its irritation, the agency said that the amended proposal to limit investments of the GraniteShares funds to bitcoin futures contracts traded on the Cboe Futures Exchange (CFE) and Chicago Mercantile Exchange (CME) wouldn’t have changed the outcome:

Although CFE and CME are “regulated markets,” the record, as discussed above, does not provide a basis for the Commission to conclude that CFE and CME are regulated markets “of significant size” in Bitcoin Futures Contracts.

The bitcoin futures market is not large enough to ensure that the cryptocurrency’s price cannot be manipulated. There have even been some charges that last year’s massive run-up in bitcoin prices was manipulated.

The SEC and the U.S. Commodities Futures Trading Commission (CFTC) have both put a stake in the ground regarding each agency’s role in regulating cryptocurrencies. If a digital asset is determined to be an equity and, therefore, regulated by the SEC, that is not as happy a solution for cryptocurrency and token issuers as being regulated as a commodity by the CFTC. Assuming that an exchange could figure out a way to offer a bitcoin-based ETF, the exchange could reap a substantial reward if enough investors begin to look at cryptocurrencies as an asset class that is easily available without having to wade into the futures and options markets.