It’s a giant sea of red for the entire digital asset marketplace this week, with the most obvious catalyst being the SEC (US Securities and Exchange Commission) announcement to delay their decision on approval of the VanEck/SolidX bitcoin ETF (Exchange-Traded Fund).
The announcement had an impact on the market this week — and has quite possibly set into motion some negative market drift for the short term. In this piece, the Element Group Asset Management Team attempts to make sense of this week’s events.
Here are some of our key takeaways:
We reviewed the SEC’s 92-page decision to disapprove the BAT BZX Exchange’s application to list the Winklevoss bitcoin ETF as well as Commissioner Pierce’s dissent.
We believe any commodity-backed bitcoin ETF is unlikely to be approved in the near future. The SEC’s past practice for evaluating other commodity-based ETFs is to first examine whether the underlying spot market is resistant to manipulation. Thus far, in the SEC’s view, no listing exchange or comment letter has met the burden of proof to demonstrate that bitcoin and bitcoin markets are resistant to manipulation.
If the SEC feels that there is insufficient proof to claim that the underlying spot market is resistant to manipulation, it could still approve the ETF if the listing exchange has entered into a “comprehensive surveillance-sharing agreement with a regulated market of significant size”.
The surveillance-sharing agreement refers to specific terminology that the SEC uses. A “surveillance-sharing agreement” means that the listing exchange and an underlying market will be able to share data on which entities made trades, in what amounts — and at what times — so that in the event of suspected market manipulation, regulators can “review the tape” and investigate any suspicious trades.
This means that under the current environment, the burden of any commodity-based bitcoin ETF listing exchange will be to convince the SEC that the underlying spot market is resistant to manipulation or have a surveillance agreement in place with one of the top exchanges.
Given the ramifications of a bitcoin ETF, the SEC has historically taken the maximum amount of time available to them to evaluate the various bitcoin ETFs. Therefore, yesterday’s market reaction to the SEC utilizing its first extension of 45 days on the VanEck SolidX ETF should have been widely expected. Given the magnitude of the selloff, this appears to not have been priced in.
There are three futures-based ETFs that are still being considered by the SEC. To the best of our knowledge, each filing will be nearing the end of the maximum 240-day period.
The three filings up for approval or disapproval are Proshares on August 23, GraniteShares on September 15, and Direction on September 21.
The insights covered in this post first appeared in our Weekly Thoughts. For more reflection and analysis on this week’s events, read the full version of this week’s report. Subscribe on our website to be amongst the first to receive our Weekly Thoughts!
In their Weekly Notes, the Element Digital Asset Management team dives deep into the current state of the cryptocurrency markets and their impact on the world to provide unique insight and commentary.