(Photo: Bloomberg)

The Securities and Exchange Commission has rejected the application of the Bitwise Bitcoin ETF to trade on the NYSE Arca exchange on the grounds that the filing does not sufficiently guard against fraud and market manipulation.

The decision follows earlier delays by the commission on the Bitwise filing and an amended filing by the NYSE Arca in May designed to address the SEC’s concerns about fraud and manipulation.

In its decision, the SEC noted that its decision “does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment,” but on the NYSE Arca’s failure to meet “its burden under the Exchange Act [of 1934] and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act … that the rules of a national securities exchange be ‘designed to prevent fraudulent and manipulative acts and practices.’ “

Bitwise Matt Hougan, Global Head of Research, Bitwise Asset Management, said in a statement that the company “deeply appreciates the SEC’s careful review,” looks forward to further engagement with the commission and intends to “re-file as soon as appropriate.”

In its 112-page rejection of the Bitwise Bitcoin ETF, the SEC cited the commission’s rejection of a bitcoin ETF application from Cameron and Tyler Winklevoss in 2018, noting that “if the listing exchange for bitcoin ETP (exchange-traded product) fails to establish that the underlying commodity market is inherently resistant to fraud and manipulation, it must enter into a surveillance-sharing agreement with a regulated market of significant size  … that would assist in detecting and deterring misconduct.” Also, according to the SEC, the ETP could not be “the predominant influence on prices in that market.”

The SEC noted that the Bitwise ETF trading on the NYSE Arca fails in both requirements.

The Bitwise ETF, which is based on the 5% of the Bitcoin spot Bitwise contends is “real” and not fake, according to its filing, “has not established that that the “‘real’ bitcoin market is isolated from the fraudulent and manipulative activity,” according to the SEC.

And the NYSE Arca, which would enter into a surveillance sharing agreement with the CME, “has not demonstrated” that the [CME’s] Bitcoin futures market is “significant” enough “to provide a necessary deterrent to manipulation,” according to the SEC.

The SEC Bitwise Bitcoin decision does not yet put the kibosh on Bitcoin ETFs. The commission is  still considering an application by Wilshire Phoenix to trade its United States Bitcoin and Treasury Investment Trust after delaying a decision in September.

“The SEC’s continued concern about fraud connected to bitcoin makes it hard to believe a bitcoin ETF will be approved in the near term,” said Todd Rosenbluth, head of ETF and mutual fund research, at CFRA. “But we are likely to see efforts to bring a product to market persist since there remains untapped demand for exposure to bitcoin.”

That persistence may be behind a product from VanEck and SolidX Management, which pulled their joint application for a Bitcoin ETF in September. The partnership is now offering shares in a VanEck SolidX Bitcoin Trust to qualified institutional buyers under Rule 144A of the Securities Act of 1933. Retail investors are excluded from the offering which is available only to BDs with at least $10 million invested in non-affiliated securities, investment firms that manage a minimum investment of $100 million in securities on a discretionary basis as well as other institutional investors.

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