SEC Rejects Winkelvoss Brothers’ ETF

The United States Securities and Exchange Commission (SEC) has rejected brothers Cameron and Tyler Winkelvoss’s most recent proposal for a cryptocurrency ETF. The proposal would have allowed shares of the Winkelvoss Bitcoin Trust to trade on the BATS BZX Exchange (owned by Cboe Global Markets).

The Winkelvoss’s first attempt at a Bitcoin ETF, filed in December 2016, was also disapproved by the SEC. But, in June, the brothers submitted a proposed rule change, which the SEC shot down yesterday.

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The founders of the cryptocurrency exchange Gemini, Cameron and Tyler Winkelvoss are perhaps best known for suing Mark Zuckerberg for allegedly stealing the idea for Facebook.

One of the arguments put forth in the proposal is “that bitcoin markets are uniquely resistant to manipulation because the 24/7/365 trading of bitcoin means that there is no single market-close for investors to attempt to manipulate.” However, the SEC countered by pointing out that “there is a single market and a single market-close event that an investor may have incentive to manipulate: the Gemini Auction, which the Trust would use to calculate NAV [net asset value].” This means that in order to manipulate the value of the ETF, one would not need to manipulate the price of Bitcoin, per se, but the price of Bitcoin on the Gemini Exchange, since that is what would be used to calculate the value of Bitcoin in the ETF.

Investor protection was perhaps the most central point of contention between the Winkelvoss brothers and the SEC. The proposal argued that a Bitcoin ETF would “facilitate a cost-effective and convenient means for investors to gain exposure to bitcoin similar to a direct investment in bitcoin, improving portfolio diversification opportunities for investors, and would help make bitcoin markets more transparent.” Furthermore, it would “bring regulatory standards and oversight to cryptocurrencies” so that investors would not “would not see major problems as they did with the Bitfinex and Mt. Gox hacks.” In other words, an ETF would go a long way in terms of bringing new investors to Bitcoin and allowing them to invest more securely.

However, the SEC ruled that the Winkelvosses and the BZX did not demonstrate that their monitoring procedures would not be sufficient to satisfy the Exchange Act Section 6(b)(5), concerning the prevention of fraud and manipulation. One of their main arguments centered on the lack of “comprehensive customer trading or identity information” despite Bitcoin’s public ledger, and the fear that a trader could establish a significant position in Bitcoin, using pseudonyms and multiple accounts, and then subsequently manipulate the price.

The proposal was voted down by a margin of 3-1. The lone dissenting vote came from Hester M. Pierce, who issued a public statement explaining her dissent. In her note, she claims that “institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order.” Basically, an approval by the SEC would fix the very problems it outlines about the ETF. She also expressed a fear of sending a “strong signal that innovation is unwelcome in our markets.”

While the rejection of the ETF proposal marks a blow for institutional acceptance of cryptocurrency — and sent the price of Bitcoin down for a short while — the news was not all bad from the SEC. In their release, they left the door open for the possibility of an approval of a Bitcoin ETF in the future:

Over time, regulated bitcoin-related markets may continue to grow and develop. For example, existing or newly created bitcoin futures markets may achieve significant size, and an ETP listing exchange may be able to demonstrate in a proposed rule change that it will be able to address the risk of fraud and manipulation… Should these circumstances develop, or conditions otherwise change in a manner that affects the Exchange Act analysis, the Commission would then have the opportunity to consider whether a bitcoin ETP would be consistent with the requirements of the Exchange Act.”


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