Investors may have to wait a lot longer for an exchange-traded fund that owns Bitcoin directly.
The Securities and Exchange Commission on Friday rejected an application by fund sponsor VanEck to launch a Bitcoin Trust ETF that aimed to own the cryptocurrency directly.
In a 51-page ruling, the SEC said that exchange company CBOE Global Markets (ticker: CBOE), which aimed to list the ETF, failed to prove that the Bitcoin spot market wasn’t subject to manipulation or fraud, and that it could be monitored adequately with a surveillance-sharing agreement with the exchange.
ETFs based on commodities spot markets need to meet regulatory standards under the Securities Exchange Act of 1934. But the SEC said VanEck failed to meet regulatory requirements in the act, which aims “to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”
VanEck was one of several fund companies trying to win approval for a spot-based ETF, following the SEC’s recent greenlight for two Bitcoin-futures ETFs: The ProShares Bitcoin Strategy ETF (BITO) and the Valkyrie Bitcoin Strategy ETF (BTF).
“We are obviously disappointed in today’s update from the SEC declining approval of our physical bitcoin ETF,” said Jan van Eck, CEO of VanEck. “We continue to believe that investors should have the ability to gain exposure to Bitcoin through a regulated investment product and that a non-futures ETF structure is the superior approach.”
The CBOE had argued that it would be inconsistent for the SEC to approve futures-based ETFs but deny a physical Bitcoin ETF based on the same underlying commodity.
The SEC rejected that argument, saying that futures ETFs were registered under a different law, the Investment Company Act of 1940. A spot-based ETF faced taller hurdles under the 1934 Act, partly because the Bitcoin futures market is regulated and can be surveilled, while the spot market for Bitcoin is globalized, decentralized, and unregulated, making it far more vulnerable to manipulation and much tougher for surveillance.
For Bitcoin-direct ETFs, the SEC said, it has “consistently required that the listing exchange have a comprehensive surveillance-sharing agreement with a regulated market of significant size,” or must demonstrate other means to prevent fraudulent and manipulative acts.
“The listing exchange has not met that requirement here,” the SEC said.
The SEC’s decision makes it unlikely that other applications for physically backed Bitcoin ETFs will be approved. Fund sponsors including Bitwise, Valkyrie and BlockFi have applied to register physical Bitcoin ETFs. Grayscale Investments aims to convert its Grayscale Bitcoin Trust (GBTC) into an ETF, from a closed-end fund structure.
Futures-based Bitcoin ETFs have been a hit. The ProShares ETF, the first out of the gate, has racked up more than $1.4 billion in assets since launching on Oct. 18. Futures ETFs have some drawbacks, though, including limits on position sizes and expenses associated with continually rolling over futures contracts—both of which can drag down returns compared to spot prices.
Fund companies may have to come up with some novel arguments for a physically backed product, however, since SEC Chair Gary Gensler has now sent a signal that a direct-Bitcoin ETF isn’t likely to hit the market on his watch.
