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Digital Currency Revolution Series: Has Saga of Bitcoin ETFs Ended on Obstacles?

Of-late, the cryptocurrency exchange-traded funds (ETFs) are branded as the trump card by many aspirants of the crypto-avenue who carry great deal of optimism that exchange-traded funds likely to stimulate cryptocurrencies with more authenticity in retail and institutional investors’ perspectives, while providing them with timely accessibility to those who already have a brokerage account.

However, the entire cryptocurrency industry has seen a struggle ever since the U.S. SEC (Securities and Exchange Commission) declined the Winklevoss twins’ attempts of launching a bitcoin ETFs.

There are several exemptions the U.S. Securities and Exchange Commission (SEC) offers that allow companies to launch their bitcoin investment products without registration. While waiting for the SEC to approve their bitcoin ETF, some firms have taken advantage of these exemptions to offer an interim product.

Despite efforts by many companies, the SEC still has not approved a bitcoin exchange-traded fund (ETF). The commission has been taking its time to evaluate any proposed rule changes for such a product that have come its way, repeatedly extending the time it takes to make a decision on each.

So, what’s hindering the regulator from approving the much-awaiting bitcoin ETFs. We have listed out quite a few hindrances: 

Data-sharing with Regulators: The SEC states that its primary goals are ensuring the protection of investors, promoting fairness in the securities markets, and sharing information that helps investors make informed decisions. 

SEC chairman Jay Clayton has stated, “there is a need for surveillance sharing between an ETF provider and major bitcoin exchanges and bitcoin derivative markets to prevent manipulation.”

However, there is little chance of this occurring as a) the majority of large exchanges are domiciled in jurisdictions with relaxed financial laws, b) there is little incentive to cooperate with a foreign regulatory agency, and c) the exchange would be turning fees away by excluding parties that attempt to manipulate the price. 

Price Manipulation: Since it is in the growth stage, bitcoin at the different exchanges are quoted considerably varied prices. The regulators declined applications on concerns over the potential for market manipulation to occur, fragmentation of prices and data, lack of industry oversight or standards and the short history and continuously evolving nature of the asset - among other reasons. 

Another cause for concern is the potential for market manipulation by early adopters and large holders - approximately 50% of the circulating supply of Bitcoin is held by <1000 wallets. 

Custodianship: How an ETF stores Bitcoin is another important consideration for regulators and the provider of the ETF. With the unrecoverable nature of any Bitcoin that is misplaced or stolen, it is extremely important that it is managed and stored in a highly secure manner. 

Typically, assets held by an ETF are managed by a third party custodian, but until recently this infrastructure has not been available for Bitcoin or other digital assets. 

Trading Hours: Another logistical concern is that cryptocurrency markets operate 24/7, whilst stock exchanges typically operate between 9:30 am and 4pm (local time) Monday to Friday. This allows the funds to settle their Net Asset Value (NAV) at the end of each trading day. However, the fact that crypto markets operate 24/7 opens up the potential for bad actors to attempt to manipulate the price, and thus NAV of the ETF, around the opening and closing hours of the exchange. Courtesy: BNC

By Niranjan Patil
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