SEC Delivers Coal Under NYSE Arca and Cboe BZX Christmas Trees as Bitcoin ETF Refusal

Two national stock exchanges found coal under their Christmas trees on December 22, 2021, in the form of orders from the Securities and Exchange Commission to disapprove their requests to change the exchange rules for listing and trading stocks. of bitcoin exchange traded funds. In both cases, the SEC concluded that the proposed rule changes were not sufficiently “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest”.

The two exchanges were NYSE Arca, Inc., which sought to list and trade shares of the Valkyrie Bitcoin Fund, and Cboe BZX Exchange, Inc. which sought to list and trade shares of the Kryptoin Bitcoin ETF Trust. Both funds have offered to hold only bitcoin and track the price of virtual currency as reflected by the CF Bitcoin US Settlement Price (an index created and administered by CF Benchmarks Ltd., currently relying on the prices of the bitcoin traded on Bitstamp, Coinbase, Gemini, itBit and Kraken).

Disapproving of the demands of the two exchanges, the SEC asserted that neither platform has entered into a “full surveillance sharing agreement with a regulated market of significant size linked to the underlying or benchmark bitcoin assets.” nor had “established that other means of preventing fraud and manipulative acts and practices are sufficient to justify departing from the required surveillance sharing arrangement.” The SEC said it was required to review scholarship proposals in light of these standards in accordance with applicable law. (Click on here to access section 6 (b) (5) of the Securities Exchange Act of 1934, 17 USC Sec. 78f (5).)

NYSE Arca and Cboe BZX each presented numerous arguments as to why they believed the bitcoin market as a whole or the bitcoin market represented by the CF Bitcoin Settlement Index to be “uniquely and inherently resistant to fraud and manipulation.” . NYSE Arca’s arguments included that the bitcoin market had grown rapidly in recent years and that billion dollar transactions had taken place without materially disrupting the market. Among other points, Cboe BZX referred to the fragmentation between bitcoin trading platforms, the relatively slow speed of bitcoin transactions, and the large capital that would be required to manipulate each trading platform as factors that would make bitcoin price manipulation difficult. . Both exchanges argued that due to the arbitrageurs in the market, manipulation of bitcoin in a particular market “would likely require overcoming the liquidity supply of those arbitrageurs who potentially eliminate any price difference between the markets.”

The SEC rejected all of these claims, generally saying that the exchanges had not provided sufficient evidence to support their proposals. In addition, the SEC also suggested that certain standard risk factor statements regarding bitcoin and bitcoin markets in each of the fund registration statements constituted the funds’ own recognition that bitcoin markets were not inherently resilient. to fraud and manipulation.

The SEC further rejected Cboe BZX’s argument that by having a joint membership with the Chicago Mercantile Exchange – home of bitcoin futures and options – within the Intermarket Surveillance Group, it had satisfied to the SEC’s alternative requirement to enter into a “comprehensive oversight sharing agreement with a regulated market of significant size relating to the underlying assets. Despite CME’s large growing volume and open interest in its bitcoin futures contract, the SEC said CME was not a significant market “because the term is used in the context of the applicable standard here.” . This is because, said the SEC “[t]The evidence does not show that there is a reasonable probability that a person attempting to manipulate the project [exchange-traded product] would have to trade in the CME bitcoin futures market to successfully manipulate it. “

NYSE Arca has not identified any market as a potential market of significant size with which it has entered into a required monitoring agreement, the SEC said.

The SEC rejected arguments from both exchanges that allowing Bitcoin ETF listing and trading would allow retail clients to gain exposure to bitcoin more securely than through at least some trading platforms of cryptocurrency. The SEC said that regardless of the benefits, the exchanges must meet the requirements of a stock exchange to be listed under applicable law. Since, in its view, the exchanges did not meet any of the potential listing avenues, the SEC “is unable to conclude that the proposed rule change conforms to the legal standard.”

The SEC has yet to approve changes to the exchange’s proposed rules for listing and trading shares of Bitcoin exchange-traded funds. Recently, however, he approved changes to the rules proposed by exchanges for listing and trading shares of bitcoin futures exchange-traded funds. (Click on here to access the article “The US bitcoin ETF makes its debut, but legal obstacles remain” Reuters Legal News, October 22, 2021.

Although the SEC “stresses again[d]”that his disapproval of the NYSE Arca and Cboe BZX nominations was not based” on an assessment of the usefulness or value of bitcoin or blockchain technology as an innovation or an investment, “his total rejection of arguments advanced by the exchanges can reasonably be taken to suggest a contrary view.

(Click on here access the SEC’s disapproval order to NYSE Arca and here to access the Board’s denial order to Cboe BZX.)

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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