Bitwise’s bitcoin ETF, the last hope, has been denied

Sorry, bitcoin ETF hopefuls. The final application for an exchange-traded fund tied to the cryptocurrency has been denied by the Securities and Exchange Commission, according to a document on the agency's website.

Bitwise's Bitcoin ETF Trust would have tracked the spot price for bitcoin had it been approved. It was originally filed with the agency on Jan. 28, and in March the commission granted a longer period to consider the new product. The denial of the fund follows the rejection of VanEck's similar bitcoin ETF last month.

Companies, including the likes of Winklevoss Capital and Realty Shares, have tried to get an ETF tied to the crypto market off the ground, but regulators have pushed back because of concerns about manipulation. Bitwise has tried to mollify the agency's concerns by pointing out the marketplaces in crypto with legitimate volumes, but the SEC said the firm doesn't explain how legitimate exchanges are isolated from exchanges cooking their order books.

"Because, among other things, the Sponsor has asserted that 95% of the bitcoin spot market consists of fake and non-economic activity, but has not established that it has, in fact, identified the “real” bitcoin market, or that the “real” bitcoin market is isolated from the fraudulent and manipulative activity, we find, in each case, that NYSE Arca has not met its burden to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), and therefore the Commission disapproves this proposed rule change," the agency wrote in its more than 100-page rejection letter.

The agency also pushed back on some of Bitwise's claims in its proposal, including that bitcoin's "unique properties" — fungibility, transportability, an exchange-tradability —make it less susceptible to manipulation. It also outlines and dissects the various claims made by Bitwise in its own research submitted to the Securities and Exchange Commission about the robustness of trading on venues that don't fake volumes, which was released in March.

"The Commission concludes that claims by the Sponsor and a commenter that the “real” spot bitcoin market is organized, efficient, resilient, or robust, or has tight spreads, do not suffice to distinguish the proposed ETP from other derivative securities products, such as equity options, where the Commission required surveillance-sharing agreements with a significant, regulated market even though effective arbitrage exists among the relevant markets," the agency said.

And herein lies something key that is missing: market surveillance-sharing agreements. In other words, cooperation on monitoring markets for suspicious and illegal trading behavior between the largest cryptocurrency exchange venues and the venues on which an ETF product would trade.

"The Commission also notes that NYSE Arca has not stated that it has entered or will enter into surveillance-sharing agreements with those “real” spot platforms that utilize surveillance tools," the agency said. "Moreover, even if NYSE Arca did enter into such agreements, it is not clear what ability NYSE Arca would have to compel the sharing of surveillance data."

So now what?

Today's news guarantees that a bitcoin ETF won't trade on a regulated U.S. equities exchange in 2019.

Just before VanEck's application was denied, the firm announced it would offer large institutions exposure to bitcoin. The new product, dubbed The VanEck SolidX Bitcoin Trust, is not the same as an ETF. For one, it won't be listed on any securities exchanges (NYSE, Nasdaq, et al.), as noted in its memorandum. As for Bitwise, it will continue to offer accredited investors access to crypto via its various fund products, which also don't trade on exchange.

Prior to the fund's rejection, Bitwise CEO Hunter Horsely told The Block that he was "optimistic" about the filing. Still, he noted that approval of new fund products is a "multi-year journey."

"If the filing is rejected next week, we'll consider the feedback the SEC shares on the concerns they're still working through and get to work on addressing them," he said at the time.

"To be clear, we already serve HNWI, multi-families, and independent advisors who don't want to wait for the public product (an ETF). People who wanted to invest before Facebook's IPO, so to speak," he added.