SEC Rejects Fidelity’s ETF Application for Proposed Rule Change

Seven days after rejecting a spot bitcoin ETF proposal by First Trust and SkyBridge Capital, the U.S. Securities and Exchange Commission (SEC) rejected the exchange trusted fund (ETF) application filed by investment giant Fidelity Investments back in March of last year. 

The application, filed by the $4.9 trillion asset manager back in March of last year, aimed to propose a rule change to be able to list and trade shares of the Wise Origin Bitcoin (BTC) Trust, listing a new BTC on the ETF. 

Upon its initial filing, Fidelity previously stated that it would be to investors’ advantage to approve the proposed rule change, as it would allow investors the ability to access the fund through a traditional brokerage account without any potential barriers to entry or risks associated with directly working with bitcoin. 

However, according to Thursday’s newly released filing, the SEC specifically rejected BZX’s proposed rule change to list and trade shares of the Wise Origin Bitcoin (BTC) Trust, expressing its concerns about fraud, manipulation, and investor protection – which comes as no surprise. 

BZX failed to put forth sufficient information reflecting market resistance to manipulation

In coming to its decision, the SEC applied the same standard used in its previous decisions ruling on proposals as it pertains to bitcoin-based commodity trusts and bitcoin-based trust issued receipts:

“This order disapproves of the proposed rule change. The Commission concludes that 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 Exchange Act Section 6(b)(5), and in particular, the requirement that the rules of a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest,” the SEC said. 

Speaking to surveillance-sharing agreements, the SEC referred back to its obligations of ensuring exchanges meet their obligations under the Exchange Act:

“…an exchange that lists bitcoin-based exchange-traded products (“ETPs”) can meet its obligations under Exchange Act Section 6(b)(5) by demonstrating that the exchange has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference bitcoin assets.”

What are “surveillance-sharing agreements?”

Surveillance-sharing agreements provide information on customer identity, market trading activity, and clearing activity that allows for the exchange to obtain the necessary information to “detect, investigate, and deter fraud and market manipulation” as well as other forms of violations that may trigger federal securities laws. The SEC relies heavily upon these types of agreements when making decisions surrounding the approval of commodity trust ETPs.

Of the many arguments the Commission made against the bitcoin market not reflecting a scenario that exerts manipulation resistance, it did indicate that current market behavior does not support that finding, pointing out that because of the lack of information provided by the Exchange to demonstrate how, if at all, how quickly price disparities may be “arbitraged away” or how “closely bitcoin prices are aligned across different bitcoin trading venues.” 

It went on to state that even if the Exchange showed “efficient price arbitrage,” that alone would not be sufficient to support a finding that a market is “uniquely and inherently resistant to manipulation.”

Lastly, in determining whether BZX met its burden to show that the requested proposal would ultimately protect investors and the public interest, the Commission deferred back to the specific requirements the Exchange Act sets forth, repeating that because the Exchange did not show how the proposal would prevent fraud and manipulation, they would not be able to move forward with the proposal anyway. 

Will the SEC continue to follow precedent?

While this order may not come as a complete surprise to many, it does seem to show that the Commission is following precedent in rejecting similar proposals to list spot bitcoin ETFs, previously rejecting proposals from Valkyrie, Kryptoin, VanEck and WisdomTree.

On January 21, BlackRock, Inc., the world’s biggest asset management firm, filed its blockchain-focused ETF with the SEC, which is currently awaiting a response from the regulator.

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