On July 26, 2018, the U.S. Securities and Exchange Commission (SEC) issued an order disapproving a proposed rule change sought by Bats BZX Exchange Inc. (BZX) that would have allowed BZX to list and trade shares of the Winklevoss Bitcoin Trust (WBT). Had the rule change been approved, the WBT would have held bitcoins as its sole asset, shares of WBT would have been issued and redeemed in exchange for bitcoin, and WBT shares would have been available only to certain "authorized participants." The WBT would have sought to have its shares track the price of bitcoin by calculating the net value of its bitcoin holdings every 15 seconds based on the price of bitcoin on the Gemini Exchange, a cryptocurrency exchange that is also owned by the Winklevoss twins.

Cameron and Tyler Winklevoss first sought SEC approval for the WBT more than five years ago, in July 2013. The brothers have amended the WBT registration statement nine times, with the recent disapproval order being the latest in a long string of rejections by the SEC. The SEC explained its rationale for this most recent disapproval order in a 92-page document. In brief, the SEC concluded that BZX was unable to show that it could design rules to prevent fraud and manipulation and to protect investors related to the WBT shares.

The SEC rejected the argument that the bitcoin market was inherently resistant to manipulation. In doing so, the SEC cited, among other things, the "51% vulnerability"; the concentration of bitcoin ownership; the prevalence of cyberattacks on bitcoin exchanges; and recent studies finding evidence of bitcoin price manipulation involving Tether, a cryptocurrency claimed to be backed 1:1 by U.S. dollars that is used as a store of value for cryptocurrency market participants. According to the SEC, because the bitcoin market is not resistant to manipulation, BZX would have had to have entered into appropriate surveillance-sharing agreements with "significant" regulated bitcoin markets in order to sufficiently deter fraud and price manipulation and protect investors. The SEC found that adequate surveillance-sharing agreements were not in place.

Notably, SEC Commissioner Hester M. Peirce issued a written dissent from the SEC's disapproval order. Commissioner Peirce wrote that the SEC erroneously focused on the characteristics of the spot market for bitcoin. According to her dissent, the appropriate focus should have been on the ability of the exchange to prevent manipulative and fraudulent trading pursuant to Section 6(b)(5) of the Securities Exchange Act of 1934. Commissioner Peirce noted that the standards, requirements and controls under which BZX proposed the trading of WBT shares offered sufficient protection. By looking beyond them and weighing the merits of bitcoin itself, Commissioner Peirce wrote that the SEC overstepped what should have been a limited inquiry. Commissioner Peirce also criticized the order because, in her view, it inhibits institutionalization and dampens innovation in the industry, which would mitigate the risks on which the disapproval order was based. According to a July 24, 2018, notice published in the Federal Register, the SEC intends to issue an order approving or disapproving a similarly situated exchange-traded product by Sept. 21, 2018.

For more information on the SEC's recent order, see the following:

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