The U.S. Securities and Exchange Commission Wednesday allowed NYSE Arca and Teucrium Trading, LLC. to issue a Bitcoin futures based exchange-traded fund (ETF) days after rejecting a spot Bitcoin ETF application from Cathie Wood-run ARK Investment Management LLC.
With the approval, Teucrium joins a host of other Bitcoin futures ETF issuers.
NYSE Arca, the first all-electronic exchange in the U.S., had filed the application for a rule change to allow for the trading of Teucrium’s fund on its ETFs platform under the Securities Exchange Act of 1934 using the 19b-4 process.
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Other-approved Bitcoin futures ETFs were filed under the Investment Company Act of 1940, which follows a slightly different pathway for approval. Earlier Bitcoin ETF approvals for funds such as ProShares and Valkyrie Investments under the Investment Company Act of 1940, were exempt from the 19b-4 process, according to Bloomberg Intelligence ETF Analyst James Seyffart. The process puts the onus on the applicant to allay any concerns from the Division of Trading and Markets at the SEC, he opined.
A fresh look
The SEC has not had the opportunity to consider whether a proposal for a Bitcoin futures-based exchange-traded product (ETP) is consistent with the Exchange Act since the early stages of bitcoin futures trading on a regulated market, the SEC said Wednesday. With respect to the proposed ETP, the underlying bitcoin assets are Chicago Mercantile Exchange (CME) bitcoin futures contracts, it noted.
The SEC agreed with Arca’s contention that the CME, as a Commodity Futures Trading Commission (CFTC)-regulated futures exchange, “has the requisite oversight, controls, and regulatory scrutiny necessary to maintain, promote, and effectuate fair and transparent trading of its listed products,” including micro Bitcoin futures (MBT) contracts and BTC contracts. The latter is a contract settled in U.S. dollars on the CME CF Bitcoin Reference Rate (BRR), and serves as a once-a-day reference rate of the U.S. dollar price of Bitcoin.
Proponents of crypto ETFs have argued that “like situations must be treated alike,” Bloomberg’s Seyffart tweeted previously referring to crypto firm Grayscale’s application to convert its Grayscale Bitcoin Fund (GBTC) to an ETF.
The SEC’s latest ruling reinforces the U.S.’ stance on viewing cryptocurrency as a commodity, Kevin Cheng, chief compliance officer of BitoEX, a major crypto exchange in Taiwan, told Forkast.
“It’s a positive signal for the crypto space,” Cheng said. “It means the regulators no longer resist or shy away from supervising such derivatives as they think there are sufficient regulatory tools in place,” he said.
However, it may take some time for the agency to give the go-ahead for Bitcoin spot ETFs, Cheng said.
The CFTC already classifies Bitcoin as a commodity along with gold and oil. Nevertheless, it does clamp down on unregistered firms that trade derivatives of the cryptocurrency, in line with its stance on similar instances with other commodities.
No room for the Ark
The commission last week rejected a spot Bitcoin ETF application Ark Investment Management and investment-product firm 21Shares after multiple delays.
The application was filed by the Cboe BZX Exchange for a similar change in the rules to allow for the listing of the Ark 21Shares offering.
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But citing a lack of investor protections, the SEC said BZX did not meet “its burden” under the Exchange Act and the Commission’s Rules of Practice in demonstrating an ability to “prevent fraudulent and manipulative acts and practices’ and ‘to protect investors and the public interest,’” the SEC wrote in its decision.
While Wood remained mum, Grayscale CEO Michael Sonnenshein wasn’t too pacifist.
“All options are on the table,” he told Bloomberg in late March when asked if he would consider filing a lawsuit against the SEC.
The SEC has yet to approve a Bitcoin spot ETF.
“It’s more of a policy matter rather than a legal concern when it comes to spot Bitcoin ETFs,” said Henry Lin, a Taiwan-based crypto lawyer at Lin and Partners, adding that Canada has already approved such a spot ETF.
The SEC might want to wait till there’s more clarity on how spot ETF issuers would handle custody and insurance concerns, Lin said.
For Asian fund managers interested in launching similar futures ETFs in the U.S., the Teucrium’s case can serve as an adequate precedent, according to Cheng. He was referring to legal parlance where applicants cite previous decisions or rulings to justify their case.
Investors in Asia have already shown interest in such crypto derivatives, Cheng added.
“Our institutional partners have expressed strong interest,” Cheng said. “And they care more if these products are governed by a sound regulatory framework in a mature market,” he said.