SEC Rejects Proposal to List and Trade Bitcoins on Regulated Exchange
Commentary by Steven Lofchie
The SEC rejected a proposal to list and trade shares of a bitcoin trust under the New York Stock Exchange Arca regulations ("NYSE Arca").
SEC Order Disapproving the Proposed Rule Change
In the Order, the SEC concluded that the NYSE Arca failed to meet its obligations under Exchange Act Section 6(b)(5) ("National Securities Exchanges"), which require that the rules of a national securities exchange be designed to (i) "prevent fraudulent and manipulative acts and practices," and (ii) "protect investors and the public interest." More specifically, the SEC stated that NYSE Arca failed to, among other things:
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demonstrate the existence of sufficient surveillance-sharing agreements with a "regulated market of significant size relating to the underlying assets"; or
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prove that the bitcoin market is uniquely resistant to manipulation beyond what "traditional security or commodity markets" are resistant to as well.
The SEC also asserted that it is not rejecting the proposal due to an assessment of whether bitcoin or blockchain technology "has value as an innovation" or is worth investing in.
Statement of Dissent
SEC Commissioner Hester M. Peirce disagreed with the SEC's disapproval, stating that this is one of the many rejected proposals that would provide market participants with access to bitcoin as a traded and listed product on a national securities exchange (see previous coverage). She purported that the rejection demonstrates the SEC's continually shifting standards for bitcoin-related products.
Ms. Peirce argued that, contrary to the SEC order disapproving the proposal, the NYSE Arca does meet the standards of compliance with Exchange Act Section 6(b)(5). She stated that denying this proposal and others that are similar is disruptive to the markets and reduces investor access to SEC-regulated markets. Further, she warned that the SEC's "hesitancy to embrace" bitcoin products could slow innovation within the United States and provide reason for entrepreneurs to seek opportunities in other jurisdictions.
Commentary
Given the size of the Bitcoin market and the fact that futures trading of Bitcoin has been going on for a while without problems, it would seem likely at this point that the SEC's refusal to permit the listing of Bitcoin ETFs is founded and its desire not to encourage further retail investment, including indirect investment, in the product. Although one can be sympathetic to the SEC's worries as to retail investors, the SEC is not supposed to serve as a gatekeeper on the wisdom of investments. See the 2020 dissent by Commissioner Hester M. Peirce as to SEC Rejects Proposal to List and Trade Bitcoins on Regulated Exchange.