Path to first SEC-approved bitcoin ETF diverges as VanEck withdraws and Bitwise charges ahead

If VanEck and SolidX’s withdrawal of their exchange-traded fund (ETF) proposal says anything about the crypto market, it's that the Securities and Exchange Commission's suspicion over cryptocurrencies may be more abiding than anticipated. 

A Sept. 17 filing shows that VanEck and SolidX retracted their ETF proposals last Friday, although in the eyes of Bitwise COO Teddy Fusaro, the withdrawal is “not that surprising."

“From a process perspective, you have two options if you think your application is going to be disapproved. You can either choose to withdraw it with the intention of submitting it again at a later date, or you could go through the disapproval process,” Fusaro told The Block. 

Bitwise, which has also submitted an ETF proposal, is determined to go through the process and receive a final decision from the SEC on its proposal. 

“The questions [the SEC] have asked are hard… The plan is for Bitwise to continue to work on answering those questions irrespective of what happens in October,” said Fusaro.

Suspicion or bias? 

The SEC’s true opinions about bitcoin ETFs remain inscrutable, with the market placing polarizing bets on them. On the one hand, SEC chairman Jay Clayton gave a positive answer when asked if “we are any closer to” seeing a Bitcoin ETF in an interview with CNBC earlier this month.

On the other, some think the regulator may understand that the cryptocurrency market is maturing, but still be reluctant to give a verdict to bitcoin ETFs. After the withdrawal news broke, VanEck digital asset strategy director Gabor Gurbacs implied on Twitter that the SEC may be imposing double-standards on approving ETFs, and that bitcoin is falling victim to the higher one. 

“This is a black box,” a source close to the matter told The Block under the condition of anonymity. 

As a footnote to the double-standard thesis, the source, and some other market observers, point to flaws in traditional asset classes, saying that market manipulation, such as the recent incident with JPMorgan manipulating the metals markets, does not deter the SEC from allowing ETFs.  

“Hundreds of billions of dollars trading without the same market mechanisms as U.S. equities. We should not have unreasonably high expectations and burdens,” the source added. 

However, Cornell law professor Robert Hockett disagrees. Hockett argues that the current cryptocurrency market is similar to that of commodities, where there are fewer traders compared to securities, resulting in a higher possibility of collusion and market manipulation. However, he argues, as cryptocurrencies become more popular, they will be more heavily traded and safer. Consequently, the SEC will feel more comfortable dealing with a bitcoin ETF at that point, according to Hockett. 

“It think it’s probably inaccurate to say that the SEC and the CFTC have double standards, they have the same standards, but standards are differently implicated by different circumstances. The fundamental divide is precisely the divide between the market that is relatively thinly traded, where a comparably small number of traders dominate, and those that are heavily traded where insiders don’t dominate,” Hockett told The Block. 

Not quitting yet

Despite regulatory confusion, VanEck’s ETF rival Bitwise is forging ahead with its own battle for SEC approval. Since January when the company submitted its application to the SEC, Bitwise has made various efforts to soothe the regulator’s concerns. In two reports published between March and May, the company first shocked the crypto industry with the finding that 95% of the bitcoin trading volumes are fake, then assured the SEC that the remaining volumes are traded in a “highly efficient” way. 

Now, less than a month away from SEC’s decision on its proposal, Bitwise told The Block that it has “met individually with three commissioners to discuss the overall state of the market.” Notably, echoing chairman Clayton's concerns, the company highlighted the institutionalization of bitcoin custody and the significance of the regulated bitcoin futures market, per a presentation to the SEC reviewed by The Block. 

Meanwhile, VanEck’s withdrawal does not mean that it will completely fade out of the bitcoin ETF market. On the contrary, the company recently launched a bitcoin trust that “looks and feels like an ETF,” according to an internal document revealed to The Block. Different from a regular ETF available to the general market, this limited edition caters to qualified institutional buyers who own or have $100 million in assets under management. 

Notably, the price for this bitcoin trust is not derived from cryptocurrency exchanges, but three major U.S.-based OTC desks Circle, DRW, and Genesis Trading. The assets will be under self-custody with insurance against loss and theft, according to the document. 

In comparison, Bitwise is opting for third-party custodian and a pricing mechanism based on cryptocurrency exchanges. The firm is hoping these two key differences may do the trick to win approval from the SEC. 

“There are material differences between the two filings, it’s also possible that they also decided they want to make design changes, or it's possible that they didn't want to deal with the publicity around having disapproval on record,” said Fusaro.