The Cboe applied in January for the rule change that would allow its GraniteShares Bitcoin ETF “Long Fund” and “Short Fund” to proceed to market.
According to the SEC, its decision to reject the Cboe proposal was not an evaluation of Bitcoin’s technology nor its, “value as an innovation or an investment.”
The Cboe, rather, had made the same weak arguments for its product as those made by the Winklevoss brothers in their recent Bitcoin ETF proposal, a product rejected by the SEC for similar reasons.
First, says the SEC, the Cboe failed to show that underlying bitcoin markets and derived futures markets are large and regulated enough to resist manipulation.
The Cboe had argued that Bitcoin markets are “diverse and continuous…(and) generally less susceptible to manipulation than the equity, fixed income, and commodity futures markets.”
They also said that, “numerous conversations,” with key individual had led them to believe that bitcoin futures markets would be, “sufficiently liquid to support numerous ETPs (exchange-traded products) shortly after launch.”
But a number of commenters on the application argued to the contrary, and the SEC said the Cboe’s claims lacked sufficient detail to be plausible.
“the Commission should not send the wrong signal to bitcoin manipulators—who…currently operate with impunity—by approving a bitcoin ETP.”
Fifteen individuals submitted comments on the Cboe ETF proposal. Many cited concerns about manipulation and lack of integrity in largely unregulated crypto markets.
One commenter urged that additional Bitcoin derivative products like ETFs should be kept on hold until new Bitcoin futures markets establish an equilibrium:
“Commencing an ETP without allowing the market to adjust to the cash-settled futures products would be akin to ‘putting the cart before the horse’ and seems to be an attempt to appease institutional investors.”
Institutional investors are said to be seeking bitcoin products with a certain profile, and the Cboe, the Winklevoss twins and others have been trying to furnish these. But commenters argued, essentially, that conditions in Bitcoin markets make an unstable base for derivatives:
“One commenter states that it is widely known in the cryptocurrency community that volatility in the Bitcoin market is the result of manipulation through the coordinated use of high-frequency trading across multiple exchanges.”
Another found possible evidence of price manipulation on the Gemini exchange itself, which is owned by the Winklevoss twins:
“One commenter asserts that data on a week’s activity on the Gemini exchange, which provides a critical input for the CFE bitcoin futures, show substantial quantities of bitcoin are bought and sold all at once. The commenter believes that this behavior does not appear to be the result of natural trading and in the long run would prevent true price discovery.”
Another commenter said the Cboe’s proposed long and short futures ETFs could, “make two-sided markets if interest in the long and short ETPs is similar in magnitude…(and) interest outside of the bitcoin ETPs may be sufficient to motivate market makers to maintain bitcoin derivatives desks.”
Other commenters wrote about concerns regarding crypto pump and dump groups on Telegram and about how 4% of bitcoin addresses purportedly control almost 97% of the world’s bitcoin supply.
One wrote about the Kraken’s crypto exchange’s refusals to cooperate with regulator inquiries and its recent exit from Japan during a regulatory swoop as yet another sign of the relatively poor integrity of crypto ecosystems.
Another commenter said, “the Commission should not send the wrong signal to bitcoin manipulators—who…currently operate with impunity—by approving a bitcoin ETP.”
See Document here.Self-Regulatory Organizations Cboe BZX Exchange, Inc. Order Disapproving a Proposed Rule Change to List and Trade the Shares of the GraniteShares Bitcoin ETF 34-83913