Now that the market excitement over the possibility of a bitcoin ETF seems to have been put to bed with the SEC rejecting both the Winklevoss and the SolidX proposals, it’s worth thinking about what needs to change for an official bitcoin investment vehicle to happen.
Forbes published today an interesting article by Moe Adham that unpacks the SEC decision. He pins the causes on two things:
- 1) The lack of “surveillance-sharing agreements with significant markets”, in this case between the listing exchange (BATS) and a commodity exchange operator (Gemini, which does not have a significant market position). The concern is that the market insignificance of the exchange on which the underlying asset will be traded could leave it vulnerable to manipulation.
- 2) The Gemini Exchange is not regulated enough (it is, though, one of only two regulated bitcoin exchanges in New York – but apparently that’s not enough).
Moe then goes on to hypothesize on what would need to happen before a US-listed bitcoin ETF is approved:
- 1) The majority of bitcoin trading needs to happen on US-based exchanges.
- 2) US-based bitcoin exchanges need to be regulated.
I agree with Moe that both of the above are unlikely to happen in the near future, but I don’t believe that those are the necessary conditions.
In its ruling, the SEC specified that the main reason for the rejection was:
“because the Commission believes that the significant markets for bitcoin are unregulated.”
While this may be true today, it’s unlikely to remain the case for long. As we have seen, several other major markets have made moves to regulate their cryptocurrency exchanges, and we will most likely see this trend pick up steam.
Even if the SEC were to insist on most exchanges being US-based (which I think even they would agree is an unreasonable condition), it’s not totally out of the question. Almost 40% bitcoin trading now happens in US$, making it the largest market, according to Cryptocompare.
Although only two of the top five US$-BTC exchanges are based in the US (Poloniex and Coinbase), one of them (Coinbase) already has a New York BitLicense. Poloniex, on the other hand, pulled out of New York rather than have to apply for a BitLicense. But that might change, either because Poloniex shifts priorities or because the requirements become less costly and cumbersome.
In the bitcoin sector, regulation is a trend that can only move forward.
With increasing exchange oversight and greater liquidity in the major trading markets, bitcoin prices will become more reliable and transparent, solving another of the SEC’s concerns.
So, I’m more optimistic than Moe that we will see a listed bitcoin ETF in the near future.
I don’t, however, think it will happen in the US first. Another country is far ahead in terms of regulation and acceptance by the financial system, and its regulators are more likely to approve a liquid, listed bitcoin investment vehicle in the short term.