Ark 21Shares bitcoin spot ETF has been rejected by the U.S. Securities and Exchange Commission due to a lack of adequate investor protection.
Ark 21Shares is a collaboration between Wall Street titan Cathie Wood’s Ark Investment Management and investment firm 21Shares, which jointly filed an application on behalf of Cboe BZX Exchange to launch its product last July. “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 in a decision statement.
Ruling on the application was delayed multiple times, the most recent postponement taking place in Jan. 2022.
Why no spot ETF?
Spot ETFs track the price of bitcoin directly without requiring clients to own the asset now. The ETFs are governed by the 1933 Securities Act process, requiring the submission of Form 19B-4 to detail how the underlying market is resistant to abuse. SEC Chair Gary Gensler has previously made known a definite preference for a bitcoin futures ETF rather than an ETF that tracks the asset directly. A futures ETF is one where a contract representing the future value of an asset (in this case, cryptocurrency) is bought or sold. The contract contains an agreement to buy or sell cryptocurrency sometime in the future, protecting investors from the inherent volatility of cryptocurrencies. If people believe the price of bitcoin will be high, then the futures contract will be expensive. The futures market is governed by the 1940 Investment Company Act, not requiring Form 19B-4.
SEC rejections frustrate some, but there is hope
The SEC has rejected multiple spot ETFs, including those from WisdomTree, One River Asset Management, VanEck, NYDIG, and Fidelity. However, a proposed SEC rule change seeking to redefine exchanges reported by Bloomberg Intelligence could see some ETFs approved by mid-2023. “Once crypto exchanges are compliant, the SEC’s primary reason for denying spot bitcoin ETFs would no longer be valid, likely clearing the way for approval,” said James Seyffart and Eric Balchunas wrote on Mar. 24, 2022. Gensler’s reluctance to approve spot ETFs is directly related to the uncertainty on which agency would oversee different areas of the industry, including exchanges.
Until that happens, however, some major industry players are getting impatient, with Grayscale’s CEO Michael Sonnenshein going so far as to say that his company is considering a lawsuit should their application for a bitcoin ETF be rejected by the SEC.
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