Bitcoin ETF: Substance over form, please (December 2021)

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Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: Since the first postponement of the decision to authorise trading in a bitcoin spot ETF — in March 2019 (proposal by VanEck and SolidX) — the US SEC has rejected eleven bitcoin spot ETFs consecutively and has not approved any. The rejections have been substantiated by the argument of insufficient compliance with Section 6(b)(5) of the Securities Exchange Act of 1934 and by insufficient evidence that the relevant bitcoin market is resistant to manipulations beyond that of traditional security or commodity markets. The SEC, however, authorised the first bitcoin futures ETF on 18 October 2021, which seems to be a situation of ‘form over substance’. A bitcoin futures ETF, being based on derivatives, is inherently riskier than a bitcoin spot ETF, and the arguments supporting the rejection of a spot ETF logically carry over the bitcoin futures ETF. The CFTC formal overseeing of the bitcoin futures cannot alleviate the substantial concerns. The sense is that by privileging form over substance, the SEC tries to risk control the access to bitcoin by retail investors. However, given the increasingly easy access to bitcoin and other cryptos through products and services offered by the (often unregulated) market, the SEC stance may increase the risks for investors rather than provide effective protection.