How to Understand the Winklevoss Twins Bitcoin ETF Rejection and the Corresponding “Winklevoss FUD”

After having their Bitcoin ETF proposal rejected by the SEC in January, the Winklevoss twins submitted an updated proposal with a few tweaks. That updated proposal was rejected by the SEC on July 26th. However, there are a number of other ETF proposals on the table. Further, the rejection had a lot of positive things to say about Bitcoin and mainly took issue with this specific proposal (so although the market is panicking, you might want to read what they said before you make up your mind).[1]

NOTE: Because everyone was waiting on the SolidX ETF August 16, the Winkelvoss rejection caused some panic. The spreading of panic and fear (AKA Winklevoss FUD) isn’t without warrant, but it is mostly unmerited. Many ETFs have been rejected, the cryptocurrency community is specifically looking to the SolidX ETF because of its relationship with the CBOE and for a host of reasons specific to that ETF.

The proposal was rejected 3-1, you can read the rejection here and read the dissenting opinion here (the one who voted to approve it).[2][3]

Consider this quote from the rejection:

Although the Commission is disapproving this proposed rule change, the Commission emphasizes that its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment. Rather, the Commission is disapproving this proposed rule change because, as discussed in detail below, BZX has not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of the Exchange Act Section 6(b)(5), in particular the requirement that its rules be designed to prevent fraudulent and manipulative acts and practices.
While the record before the Commission indicates that a substantial majority of bitcoin trading occurs on unregulated venues overseas that are relatively new and that, generally, appear to trade only digital assets,22 and while the record does not support a conclusion that bitcoin derivatives markets have attained significant size,23 the Commission notes that regulated bitcoin-related markets are in the early stages of their development. Over time, regulated bitcoin-related markets may continue to grow and develop. For example, existing or newly created bitcoin futures markets may achieve significant size, and an ETP listing exchange may be able to demonstrate in a proposed rule change that it will be able to address the risk of fraud and manipulation by sharing surveillance information with a regulated market of significant size related to bitcoin, as well as, where appropriate, with the spot markets underlying relevant bitcoin derivatives. Should these circumstances develop, or conditions otherwise change in a manner that affects the Exchange Act analysis, the Commission would then have the opportunity to consider whether a bitcoin ETP would be consistent with the requirements of the Exchange Act.

Now consider the dissenting Commissioner’s Take:

I respectfully dissent from the Commission’s order disapproving a proposed rule change, as amended, to list and trade shares of the Winklevoss Bitcoin Trust on Bats BZX Exchange, Inc. (“BZX”).[1] As the order notes, in reviewing such a proposed rule change, the Commission considers whether the proposed change is consistent with the Securities Exchange Act of 1934 (“Exchange Act”) and the rules and regulations thereunder.[2] Contrary to the Commission’s determination, I believe that the proposed rule change satisfies the statutory standard and that we should permit BZX to list and trade this bitcoin-based exchange-traded product (“ETP”). Accordingly, I would set aside the action the staff took by delegated authority in this matter and approve the proposed rule change.

In addition, I am concerned that the Commission’s approach undermines investor protection by precluding greater institutionalization of the bitcoin market. More institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order. More generally, the Commission’s interpretation and application of the statutory standard sends a strong signal that innovation is unwelcome in our markets, a signal that may have effects far beyond the fate of bitcoin ETPs.

With that covered, there is a lot of important factors to note. First off, two important proposals that are up for approval or rejection are the SolidX shares ETF submitted by the CBOE, its deadline is August 16, and the Direxion Long and Shot ETFs submitted by the CBOE, its deadline is September 15.

Both of those might include rules that would ensure against the issues the SEC took with the Winkelvoss ETF. Further, since one of the 4 commissioners dissented, it is possible that she will be able to make her case to the other commissioners before the upcoming August 15 and Sept 15 deadlines.

In simple terms, in some ways it doesn’t bode for the other ETFs that the Winklevoss twins had their updated proposal rejected, in other ways this action doesn’t speak to whether or not the CBOE’s proposals will be accepted or rejected.

The Winklevoss one is the same proposal that was previously rejected with a simple rule change. Meanwhile, the Solidx one is a new proposal.

Further, the Direxion ones (and others) just had their deadline extended (rather than their ETFs being rejected).

In other words, while it isn’t great news, the rejection of one ETF does not spell doom for the others.

Right now there are a number of Bitcoin products that trade on the market, GBTC (a trust, essentially an ETF), CME Futures (which use Gemini data, where Gemini is owned by the Winklevoss twins), and CBOE futures.

CBOE’s ones are the ones that matter most and are what a lot of the excitement over the past week has been about. CBOE is an exchange that already has futures listed and they already have a good standing with the SEC. It would make sense that the first Bitcoin ETF would be listed on an exchange like CBOE.

In summary, an approval would have been great news, but this was not the ETF everyone was waiting for. The August 16 SolidX submission by CBOE is still the holy grail. If that fails it’ll be a bit more bleak. Then you have the Direxion ones. If they fail, then it is back to the drawing board (although more proposals could be submitted in the meantime).

To end, one has to note that this isn’t a “hard no” from what I understand (reporting is sparse right now; CNBC just broke the story), this is a continuation of what we have been hearing all year. That is, “significant investor protection issues that need to be examined before sponsors can offer these funds to retail investors.” In fact, that is a line right out of the rejection letter from January 18th.

Considering all the Winklevoss twins did was tweak one rule and resubmit, it really isn’t shocking that this proposal was rejected.

All that said, the crypto market is fickle, so use your best judgement to decide if you’ll stick it out for the more important CBOE ETFs.

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Citations

  1. Winklevoss twins bitcoin ETF rejected by SEC. CNBC.com.
  2. Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, to List and Trade Shares of the Winklevoss Bitcoin Trust. SEC.Gov.
  3. Dissent of Commissioner Hester M. Peirce to Release No. 34-83723; File No. SR-BatsBZX-2016-30. SEC.Gov.


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