It was no surprise when the SEC recently denied the most recent request for a spot Bitcoin ETF.  That has been the SEC’s response to every such application ever made to it.  This particular request was by VanEck, which had already had an earlier request denied as well.  According to the SEC, generally speaking, the submission was not sufficiently structured to prevent fraud and manipulation.  In language it has used before, the SEC said: 

The Commission concludes that BZX has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), which requires, in relevant part, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.

The more interesting part of this application was the strong dissenting Statement (the “Dissent”) issued in response by Republican Commissioners Hester Peirce and Mark Uyeda (the “Commissioners”).

The Commissioners noted that the Bitcoin market had evolved since the first denial, and yet the SEC’s analysis remained exactly the same.  But their primary point concerned the way the Commission was treating Bitcoin ETFs differently from every other commodity-based ETP (exchange-traded product).

The Dissent explained that the SEC argues that its analysis in these denials is consistent with its approach to considering earlier holdings related to non-bitcoin commodity-based ETPs, in which “there has been in every case at least one significant, regulated market for trading futures on the underlying commodity[,] and the ETP listing exchange” has had a surveillance sharing arrangement with that market.  Finding that the applicant-exchange has not established that “it is reasonably likely that a would-be manipulator of the proposed ETP would have to trade on the CME bitcoin futures market to successfully manipulate the proposed ETP,” the Commission concludes that the exchange has not established that that futures market is a “market of significant size” in relation to the bitcoin spot market.

According to the Dissent, the Commission is using a uniquely burdensome definition of “significant” in its analyses of spot bitcoin ETP filings:

Rather than look at the size and quality of the relevant futures market to determine whether it is significant, the Commission, beginning in 2018, has insisted that a bitcoin futures market is “significant” for the purposes of determining whether listing and trading a related product only if it meets two conditions:

(a) there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, so that a surveillance-sharing agreement would assist the ETP listing market in detecting and deterring misconduct, and (b) it is unlikely that trading in the ETP would be the predominant influence on prices in that market.

But, the Dissent says, there is no indication that this standard applied in any of the many prior approval orders that the Commission has cited as showing that the “significance” of a regulated market is important in its approval of commodity-based ETPs.

According to the Commissioners, the SEC has never explained why the two-part test applied to Bitcoin ETFs has never been applied to any other commodity-based ETP.  The Commissioners believe that this two-part test should never be used, but also point out that, if it is being used for some, the SEC should at least explain why it has determined that it is not necessary to apply this test to these other products it has approved, even after it has determined that a bitcoin futures market cannot be treated as “significant” until an exchange establishes that that market satisfies this two-part test.  Furthermore, the Commission has never provided any evidence that any of the non-bitcoin commodity-based ETPs could themselves satisfy the two-part test.

The Commissioners concluded:

We believe that the Commission’s decision to subject spot bitcoin-based ETPs to a bespoke standard that may be impossible for any product to meet has harmed investors by making it harder for the bitcoin market to mature through institutionalization and easier, and potentially safer, retail investor access. But our concern is not just with bitcoin. If we use the test in other markets, we will prevent other products from coming to market. Had we applied the test to other commodity-based ETPs, they might not be trading today. Arbitrarily depriving investors of access to products does not protect them. Consistent application of the standards Congress gave us does.


David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. David has been included in Chambers for his expertise in international arbitration. He is the editor of the firm's blockchain blog.