American regulation body comes out against Bitcoin ETFs

A major American regulator has announced its decision to block the creation of a number of proposed new Bitcoin funds.

The Securities and Exchange Commission (SEC) said that it was concerned that fraud was a risk if the Bitcoin exchange traded funds (ETFs) went ahead.

ETFs are securities with values derived from another asset, and which enjoy dynamic prices – largely similar to an item on a stock exchange. They offer traders a range of additional options compared to standard cryptocurrency trading, including the chance to invest in “physical” cryptocurrencies.

The ETFs ruled out by the SEC in this particular round of rejections were diverse. Five proposals by Direxion were leveraged products, which would have given investors the chance to enhance any potential profits through the use of debt.

A rejected pair of proposed funds from ProShares would have been derived from futures contracts in a Bitcoin context had they been approved.

According to the SEC, it made the decision in part because of concerns over “fraud and manipulation of bitcoin markets”.

“A national securities exchange’s rules must be designed to prevent fraudulent and manipulative acts and practices,” it said.

However, it also returned to a common regulation problem that the crypto world has had to grapple with in recent years: whether or not it has the characteristics and nature to be effectively regulated by a traditional regulator.

A few cryptocurrencies have been accepted as being securities by the wider industry, but debate rages over whether or not most meet that definition, especially when size is taken into consideration.

“Among other things, the Exchange has offered no record evidence to demonstrate that Bitcoin futures markets are ‘markets of significant size’,” the SEC added.

The recent decision comes after a range of ETF license application rejections were given to Cameron and Tyler Winklevoss, two internet investors who previously sued Mark Zuckerberg over claims he stole their ideas when creating Facebook.

The Winklevoss twins, who now invest in major crypto payment service BitInstant, found out earlier this month that their application for a Bitcoin ETF had been declined.

According to Tyler Winklevoss, the reason that this hybrid of Bitcoin and a traditional physical investment vehicle didn’t work out was because of a mood of suspicion towards cryptocurrencies among institutional investors.

“Wall Street is taking cryptocurrencies seriously, however, the vast majority of Wall Street firms are still not participating in the cryptocurrency market, which remains primarily a retail-driven market,” he said in an interview.

However, he was positive about what he predicts will be the eventual outcome: “This will change over time, but it will take time,” he emphasised.

More broadly, the SEC has waded into the cryptocurrency debate on several occasions in the past and is likely to do so again.

Industry experts suggest that approval of ETF applications by this and other regulators won’t occur until the cryptocurrency world can show that prices are safe against market manipulating, perhaps by instituting “surveillance-sharing” type arrangements which monitor the market on a regular basis.

Nigel Frith

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