Understanding the SEC’s decision to delay on bitcoin ETFs

Observations from Element Group’s Asset Management Team following the SEC announcement to postpone decision-making on bitcoin ETFs

(These insights first appeared in our Weekly Thoughts. Subscribe here)

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:

Takeaway #1

Bitcoin commodity-based ETF approval is unlikely under the current environment

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”.

What a “surveillance-sharing agreement” means

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.

What does this all mean for the SEC’s decision-making process on ETFs?

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.

Takeaway #2

The SEC can extend the time period up to 240 days. The standard approval process for ETFs by the SEC:

1. The national securities exchange that wants to list the ETF files with the SEC for a “proposed rule change”.
2. As soon as it is practical, the SEC publishes notice of the rule change in the Federal Register and solicits comments.
3. Within 45 days of the publication, the SEC must either approve, disapprove, or initiate proceedings (with a possible extension of 45 days).
4. There is then a period of 180 days for the listing exchange to address grounds for disapproval that may have been highlighted by the SEC.
5. However, the SEC may extend this time period an additional 60 days if it determines a longer period is appropriate.

And what does this mean for the decision-making timeline?

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.

The most important decision-dates coming up for futures-based ETFs

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.