SEC Rejects Bitcoin ETF Application, Dashing Hopes of Investors

• The US Securities and Exchange Commission (SEC) has rejected an application from Ark Investment Management and 21Shares to list a spot Bitcoin (BTC) exchange-traded fund (ETF).
• The SEC has determined that the Cboe BZX Exchange, where the ETF would be listed, has failed to meet the requirements of Exchange Act Section 6(b)(5) regarding the prevention of fraudulent and manipulative practices.
• The SEC stated that it requires a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets in order for an exchange to list an exchange-traded product.

The US Securities and Exchange Commission (SEC) has denied an application from Ark Investment Management and 21Shares to list a spot Bitcoin (BTC) exchange-traded fund (ETF) for the second time. The SEC discussed the Cboe BZX Exchange on which the ETF would be listed and stated that the exchange has failed to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5), which requires, in relevant part, that the rules of a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”

The SEC went on to say that it uses the same analytical framework when assessing if an exchange looking to list an exchange-traded product (ETP) can meet its obligations under Exchange Act Section 6(b)(5). An exchange that lists bitcoin-based ETPs can meet its obligations under this Act, said the Commission, by demonstrating that it has “a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets.”

The SEC stated that while surveillance-sharing agreements are not the only way for a listing exchange of a commodity-trust ETP to meet its obligations, “Where, as here, a listing exchange fails to establish that other means to prevent fraudulent and manipulative acts and practices will be sufficient, it must demonstrate that its proposal is consistent with the Exchange Act and the Commission’s rules, including the requirement that the rules of the exchange be designed to prevent fraudulent and manipulative acts and practices.”

The SEC has determined that the Cboe BZX Exchange has not met the requirements and has thus rejected the application to list the spot Bitcoin (BTC) exchange-traded fund (ETF). This is the second time the SEC has refused to give its regulatory blessing to Ark Investment Management and 21Shares to list the ETF.

The rejection of the application has put a damper on the hopes of investors who were excited at the prospect of a Bitcoin ETF. Without an ETF, investors must go through the process of buying and storing their own Bitcoin, which can be time consuming and risky. It is unclear when the SEC may approve a Bitcoin ETF, but it is certainly something that investors are watching closely.