The U.S. Securities and Exchange Commission (SEC) denied proposals to list and trade shares of two bitcoin trust exchanges: one denial issued on March 10 and the other on March 28, 2017. In both matters, the SEC found that an exchange that lists commodity-trust exchange-traded products (“ETPs”) must meet applicable requirements, including that (1) the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity [bitcoin] or derivatives on that commodity and (2) those markets must be regulated.
In these matters, the SEC found that the significant markets for bitcoin are unregulated. Therefore, the exchanges would be unable to enter into agreements for surveillance sharing that would provide party and transaction information that would “help address concerns about the potential for fraudulent or manipulative acts and practices in this market.” Bitcoin transactions are pseudonymous: only the address of the digital “wallets” involved in the transaction are available on the public blockchain.
Since 1990, the SEC has found that the ability of a national securities exchange to enter into surveillance-sharing agreements furthers protections of both investors and the public interest because the exchange could promptly investigate possible violations. In denying the bitcoin exchanges’ proposal, the SEC stated:
Absent the ability to detect and deter manipulation of the Shares—through surveillance sharing with significant regulated markets related to the underlying asset—the Commission does not believe that a national securities exchange can meet its Exchange Act obligations when listing shares of a commodity-trust ETP.
With respect to regulation, the SEC has characterized the worldwide spot market for bitcoin as having “no meaningful government market oversight designed to detect and deter fraudulent and manipulative activities.” The SEC recognized that while certain bitcoin markets might be subject to consumer protection, customer identification, anti-money laundering, and cybersecurity compliance requirements, these regulations are not sufficient for the SEC. The SEC imposes additional requirements, including rules “designed to prevent fraudulent and manipulative acts and practices.”
Procedurally, both bitcoin trust exchanges had proposed that the SEC change its rules to permit the exchanges to list and trade shares in the bitcoin trusts. Because the SEC disapproved of the proposed rule changes in both cases, the next step would be for the trusts to petition the SEC for review of the decision.
One of the trusts already has filed a Petition for Review with the SEC, citing among other assertions, that the standard applied by the SEC staff was not in line with similar previous approval orders.
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