Just a bit more than two weeks after effectively shutting down the Winklevoss Bitcoin Trust's bid to become the first bitcoin exchange-traded fund, the SEC has similarly halted the launch of the SolidX Bitcoin Trust. On Wednesday, March 28, 2017, the SEC issued an order denying the critical approval for the ETF to trade on its designated exchange, in this case the NYSE Arca.
The SEC's lengthy, thoughtful order largely tracks the order that it issued to Bats BZX Exchange in connection with the Winklevoss Bitcoin Trust. In so doing, it affirms the speculation that the SEC's reasoning in their prior order should be read to have general application, and thus as a bar on the ability of any U.S. exchange to trade shares that represent pooled interests in a portfolio of bitcoin.
In particular, the SEC noted that SolidX Management LLC, the sponsor of the SolidX Bitcoin Trust, had arranged for insurance coverage to protect investors against risk of loss or theft of the trust's bitcoin. The SEC also noted NYSE Arca's position that the XBX Index price that would be used for valuing the SolidX Bitcoin Trust's bitcoin holdings, which relies on a proprietary weighting methodology, would be protected against any undue impact from bitcoin pricing outliers among the various exchanges and from any potential attempts to manipulate the price of bitcoin.
Nonetheless, the SEC concluded that these facts did not distinguish the proposed ETF from the Winklevoss Bitcoin Trust in any of the respects key to the SEC's analysis. In each case, the SEC regarded the trust's application for a rule change to be inconsistent with the requirement that each national securities exchange design its rules "to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest."
So long as the SEC holds that trading in bitcoin occurs extensively on unregulated non-U.S. exchanges and that bitcoin is still in the "relatively early stages of its development," we can anticipate that the prospect of a U.S. exchange-traded bitcoin ETF will remain an idea before its time.
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