Last month, the SEC officially rejected the Winklevoss Bitcoin ETF filed with the Bats BZX Exchange with a 92-page document which explicitly stated that the commission was not satisfied with the dependence of the value of the ETF on public cryptocurrency exchanges.
Specifically, the SEC said that strictly regulated exchanges like Gemini operating in the US market with a proper license are still not resistant to manipulation, and hence, there exists risk involved in basing the base value of a bitcoin ETF on the price listed on exchanges.
“In Section III.B, the Commission addresses BZX’s assertion that bitcoin and bitcoin markets, including the Gemini Exchange, are uniquely resistant to manipulation and finds that the record before the Commission does not support such a conclusion,” the SEC said.
But, the SEC further emphasized that the disapproval of the Winklevoss Bitcoin ETF does not signify the commission’s stance on cryptocurrency or blockchain but simply the lack of a trusted price formation that may leave the ETF and the global Bitcoin market open to price manipulation.
The SEC added:
“Although the Commission is disapproving this proposed rule change, the Commission emphasizes that its disapproval does not rest on an evaluation of whether bitcoin or blockchain technology more generally, has utility or value as an innovation or an investment.”
Conclusively, the denial of the Winklevoss ETF mainly pertained to its reliance on Gemini to establish the value of BTC, which the SEC did not approve of.
Recently, Bakkt, a new company designed to bring digital assets to the mainstream created by Microsoft, Starbucks, and New York Stock Exchange (NYSE), stated that it is working on building a consistent regulatory construct; transparent, efficient price discovery; and an institutional quality pre- and post-trade infrastructure.
More importantly, Bakkt, which is targeting to serve institutional investors in the US market, said that its exchange will not allow BTC to be traded on margin or leverage, which is the primary reason why the nine ETFs from ProShares and Direxion were rejected this week.
“A critical element to price discovery is physical delivery. Specifically, with our solution, the buying and selling of Bitcoin is fully collateralized or pre-funded. As such, our new daily Bitcoin contract will not be traded on margin, use leverage, or serve to create a paper claim on a real asset,” the Bakkt team said.
In the past month, the SEC laid out the following to issues as the main problems of the 10 ETFs that were rejected:
Lack of trusted price formation
Reliance on futures markets and derivatives
The Bakkt exchange satisfies both requirements from the SEC and if Bakkt continues to establish its focus on finding a trusted price formation, it is possible that it could impact the approval of the first bitcoin ETF.