SEC Rejects VanEck’s Bitcoin Spot ETF: Is the Crypto ETF Dream Fading?

Another day, another Bitcoin spot ETF rejection from the U.S. Securities and Exchange Commission (SEC). Crypto enthusiasts were holding their breath, hoping for a breakthrough, but the SEC has once again dashed those hopes by denying VanEck’s proposal to list a Bitcoin spot Exchange Traded Fund (ETF). This marks the third time VanEck has faced rejection for a similar product, leaving many in the crypto community wondering – when, if ever, will a Bitcoin spot ETF finally get the green light in the US?

Déjà Vu? SEC Cites Familiar Concerns

In a recent filing, the SEC announced its decision to reject a proposed rule change by the Cboe BZX Exchange that would have allowed the listing of VanEck’s Bitcoin spot ETF. This decision, coming less than a year after the proposal was initially submitted in June 2022, echoes previous rejections in 2021 and 2017 for similar VanEck applications. The SEC also has a history of delaying decisions on these types of products, creating a sense of anticipation followed by disappointment for the crypto market.

So, what’s the sticking point this time? You guessed it – market manipulation. The SEC maintains its stance that ETF providers haven’t adequately demonstrated their ability to prevent manipulative practices in the Bitcoin market. Specifically, they argue that applicants haven’t proven they have a “surveillance-sharing agreement” with a regulated market of significant size related to Bitcoin trading. This justification is becoming a familiar refrain, as the SEC has used similar reasoning to reject spot ETF proposals from other major players like WisdomTree, ARK Invest, and Valkyrie Investments.

Dissent in the Ranks: Commissioners Question SEC’s Stance

However, this time, the SEC’s decision wasn’t unanimous. Commissioners Hester Peirce and Mark Uyeda publicly dissented, raising serious questions about the consistency and fairness of the SEC’s approach to crypto ETFs. They pointed out that it’s been six long years since the very first application for a spot Bitcoin Exchange Traded Product (ETP) was turned down by the agency.

Peirce and Uyeda argue that the SEC is applying “uniquely burdensome” standards to Bitcoin spot ETPs, despite the agency’s claim of using consistent criteria across all ETP proposals. They highlight specific points of contention:

• Defining a “Significant” Market: The commissioners argue that the SEC’s guidelines for identifying a “major” market are traditionally applied to individual trading venues, not to an entire asset market like Bitcoin. This distinction, they suggest, is unfairly disadvantageous to crypto ETFs.
• The Two-Part Test: Peirce and Uyeda criticize the SEC’s apparent two-pronged test for surveillance measures. This test, they explain, requires demonstrating:
  1. That a manipulator would *need* to trade on the ‘relevant market’ for surveillance to be effective.
  2. That ETP trading would have a *predominant* impact on prices in that ‘relevant market’.

  They argue that these stringent criteria seem to be exclusively applied to crypto goods, creating a double standard.

Commissioner Peirce has been a vocal critic of the SEC’s stance on crypto regulation in the past. Her continued dissent, along with Commissioner Uyeda’s, underscores a growing debate within the regulatory body itself about the appropriate approach to crypto investment products.

Grayscale’s Lawsuit: A Potential Game Changer?

Amidst this ongoing regulatory tug-of-war, Grayscale Investments, a major player in crypto asset management, is taking a different approach. Following the SEC’s rejection of their bid to convert the Grayscale Bitcoin Trust (GBTC) into a spot ETF, Grayscale launched a lawsuit against the SEC.

The outcome of this lawsuit could have significant implications for the future of Bitcoin spot ETFs in the US. If Grayscale is successful, it could potentially force the SEC to reconsider its stance and pave the way for approvals. Many in the crypto industry are watching this legal battle closely, hoping it will be the catalyst for a change in the SEC’s approach.

Why the Reluctance? Understanding the SEC’s Position

Why is the SEC so hesitant to approve a Bitcoin spot ETF? While the official reason consistently revolves around market manipulation concerns, there are likely other factors at play. Some speculate that the SEC is taking a cautious approach to protect retail investors in a relatively new and volatile asset class. Others believe there might be a degree of institutional resistance to fully embracing cryptocurrencies within traditional financial frameworks.

Regardless of the underlying reasons, the SEC’s continued rejections highlight the ongoing regulatory uncertainty surrounding crypto in the US. This uncertainty can be frustrating for investors and businesses alike, hindering wider adoption and innovation in the crypto space.

The Crypto ETF Landscape: What’s Next?

Despite the setbacks, the demand for a Bitcoin spot ETF remains strong. Many believe it would provide a more accessible and regulated way for both retail and institutional investors to gain exposure to Bitcoin. Here’s a quick look at the current situation and potential future developments:

• Continued Applications: Despite repeated rejections, companies like VanEck, ARK Invest, and others are likely to continue submitting applications for Bitcoin spot ETFs. Persistence might eventually pay off, especially if the regulatory landscape shifts.
• Grayscale Lawsuit Outcome: The legal challenge from Grayscale is a major factor to watch. A favorable ruling could significantly alter the SEC’s approach.
• Regulatory Evolution: The crypto regulatory environment is constantly evolving. Increased clarity and potentially more favorable regulations in the future could make spot ETF approvals more likely.
• Focus on Futures ETFs: Currently, the SEC has approved Bitcoin futures ETFs. While these provide some exposure to Bitcoin, they are not the same as spot ETFs and can come with complexities and potential tracking errors.
• International Examples: It’s worth noting that Bitcoin spot ETFs are already available in other countries, like Canada and parts of Europe. The US is lagging behind in this regard.

The Bottom Line: Patience Required for Crypto ETF Approval

The SEC’s latest rejection of VanEck’s Bitcoin spot ETF is another reminder that the path to mainstream crypto investment products in the US is proving to be a long and winding one. While dissenting voices within the SEC and legal challenges like Grayscale’s offer glimmers of hope, the regulatory hurdles remain significant. For now, crypto enthusiasts and investors will need to exercise patience and continue to watch how this regulatory saga unfolds. The dream of a readily accessible and regulated Bitcoin spot ETF in the US is still alive, but it seems the finish line is not yet in sight.