Bitcoin ETF Review Delayed, What's the Real Reason of SEC?

Summary

The U.S. Securities and Exchange Commission (SEC) has delayed for a second time the approval of a bitcoin spot exchange traded fund (ETF) applied for by four asset managers, including BlackRock, making it unlikely that a bitcoin spot ETF product targeting the U.S. market will pass before the end of the year. The SEC cited the potential for price manipulation, along with concerns about the US government shutdown, as reasons for the decision and asked for additional comments to be submitted.

SEC Bitcoin ETF postpones approval review

The US Securities and Exchange Commission (SEC) has postponed its approval review of a bitcoin spot ETF for the second time. This time, the delayed product is a bitcoin ETF submitted by four asset managers - BlackRock, Bitwise, Valkyrie, and Invesco. The approval review was originally scheduled for mid-October, but has now been pushed back to early next year, which means it will take longer for a Bitcoin ETF product to launch in the US market.

Reasons for the delay

The SEC cited the risk of a US government shutdown as a reason for postponing the approval review, as a prolonged shutdown could make it impossible to conduct a normal review. However, there appears to be a more important reason.

In the document, the SEC requested additional comments on five points, explaining that "additional input from the applicant is necessary to prevent fraudulent and manipulative conduct and to protect investors and the public interest." These points appear to be directed at providing evidence that the Bitcoin ETF will prevent price manipulation. This suggests that the SEC is asking the applicant to demonstrate that the ETF product will not be vulnerable to market manipulation.

Additional requests from SEC

The five points requested by the SEC are as follows:

1. Whether the proposed product or share is vulnerable to market manipulation.
2. What you think of the argument that bitcoin spot itself is difficult to manipulate due to its geography, etc.
3. Whether the Chicago Mercantile Exchange (CME), where bitcoin futures are traded, is representative of a sufficiently large regulated market for bitcoin spot.
4. What are your views on claims by some asset managers that the CME Bitcoin futures market and the Bitcoin spot market price are highly correlated?
5. Whether they believe cryptocurrency exchange Coinbase is a suitable party to a surveillance sharing agreement to curb price manipulation.

The asset managers have 21 days to submit responses to these questions.

Relevance to CME Bitcoin Futures Prices

The correlation between CME's bitcoin futures prices and the spot price of bitcoin was previously determined by the SEC in Grayscale v. SEC. A federal court ruled in favor of the SEC in denying Grayscale's application to convert to a Bitcoin spot ETF, finding that "Grayscale provided evidence that CME's Bitcoin futures price is 99.9% correlated to the spot price."

Conclusion

The SEC's delay in approving Bitcoin ETFs has prompted a request for further comment, which will require asset managers to provide evidence that Bitcoin ETFs will prevent market manipulation. The delay has increased the likelihood that ETF launches will be delayed, and the timeline for future approvals is uncertain.