The cryptocurrency market has faced significant headwinds as regulatory scrutiny intensifies globally. A major setback occurred on August 22nd when the U.S. Securities and Exchange Commission (SEC) rejected nine Bitcoin Exchange-Traded Fund (ETF) proposals from ProShares, Direxion, and GraniteShares. This decision delivered another blow to the development of regulated cryptocurrency derivative products.
Following this regulatory news, digital asset prices experienced a broad decline. According to data from CoinMarketCap, the price of Bitcoin has fallen approximately 70% since the beginning of the year. The total market capitalization of cryptocurrencies has shrunk from over $800 billion in early January to approximately $200 billion currently, representing a decline of about three-quarters.
The Ongoing Challenge of Bitcoin ETF Approval
For many mainstream investors, directly purchasing and storing digital currencies presents significant technical and security challenges. Derivative products offer a potentially more accessible alternative for gaining exposure to this asset class.
The launch of Bitcoin futures contracts by the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE) in December 2017 demonstrated market demand for such regulated instruments. These futures contracts were generally well-received by institutional traders.
However, another proposed product—the Bitcoin ETF—has faced a much more difficult path to regulatory approval. The first Bitcoin ETF application was submitted to the SEC in 2014 by the Winklevoss twins through their Gemini cryptocurrency exchange. After a three-year review process, the SEC ultimately rejected this pioneering application in March 2017. Despite a petition for reconsideration, the decision stood. Over the past two years, the SEC has rejected more than a dozen similar Bitcoin ETF proposals.
Analysts from Huobi Blockchain Research Institute noted several advantages that a Bitcoin ETF would provide: "The benefit of a Bitcoin ETF is that holders indirectly own Bitcoin, enjoying potential price appreciation without worrying about private key security or asset theft risks. Funds, insurance companies, and ordinary investors could all allocate to Bitcoin, lowering the barrier to entry and potentially increasing market liquidity. Simultaneously, hedge funds and asset management institutions see substantial opportunities in this space. SEC approval of a Bitcoin ETF would essentially provide regulatory endorsement of Bitcoin's legitimacy, enabling significant institutional allocation and generating trading commissions."
Why Regulatory Approval Remains Pending
The nine recently rejected Bitcoin ETF applications were all tied to Bitcoin futures markets rather than directly to spot Bitcoin prices. For futures-based Bitcoin ETFs, fund shares would be based on Bitcoin futures contracts rather than Bitcoin itself, theoretically reducing certain risks. However, the SEC denied these applications, stating that the exchanges had failed to provide sufficient evidence that the Bitcoin futures market was of "significant size."
The SEC emphasized that its rejection did not constitute a denial of Bitcoin or blockchain technology's general utility, nor did it否定 their value as innovations or investments.
Previously, the SEC had solicited comments on Bitcoin ETF-related topics, receiving largely positive feedback. Supporters argued that Bitcoin ETFs would ultimately make cryptocurrency markets safer and more trustworthy for investors.
The Huobi analyst added, "Digital currencies, represented by Bitcoin, have established a certain investor base. As the digital currency market matures, the eventual approval of a Bitcoin ETF is foreseeable."
Currently, a Bitcoin ETF application from Chicago Board Options Exchange (CBOE) remains under review, with results expected in September. Market participants anticipate that this product stands the best chance of receiving approval.
Underlying Risks in Digital Currency Markets
Beyond concerns about market size, the SEC's rejection理由 also cited insufficient protections against fraud and market manipulation.
The Huobi Blockchain Research analyst explained a key difference: "Unlike traditional financial assets that trade on specific exchanges, digital asset trading is dispersed across various cryptocurrency exchanges. These platforms often show price disparities, with spreads and trading volumes exhibiting instability. This makes establishing a fair Bitcoin price difficult and leads to severe market fragmentation."
The SEC has expressed concerns that while market participants can分散 their funds for cross-exchange arbitrage, they could also concentrate resources to manipulate trading on specific exchanges. Since digital currency prices are highly sensitive to market sentiment and public attention, many might attempt to create abnormal price fluctuations for profit.
There is already concluded research suggesting Bitcoin prices can be manipulated. 2017 was a year of迅猛 development for cryptocurrencies, particularly Bitcoin, which soared from around $1,000 at the end of 2016 to nearly $19,000 by December 2017. Particularly in November 2017, Bitcoin's price tripled in less than a month. This steep rally proved unsustainable, and by February 2018, the price had crashed to around $7,000.
A June SSRN working paper by University of Texas finance professors John M. Griffin and Amin Shams concluded that approximately half of Bitcoin's price increase in 2017 could be attributed to market manipulation.
Additionally, fraudulent activities during the Initial Coin Offering (ICO) phase have raised significant regulatory concerns globally.
In May 2018, an analysis of 1,450 ICOs by the Wall Street Journal found that 271 showed clear "red flags," such as plagiarized documentation and falsified regulatory approvals. The report stated that investor losses from these problematic projects had already reached an estimated $273 million based on lawsuits and regulatory actions.
According to Bloomberg, in early August, the SEC intensified its scrutiny of digital currency brokerage businesses, requesting information on cryptocurrency trading, financing, ICO-related fees, and data on transactions involving investment advisers to identify potential investor fraud.
SEC Chairman Jay Clayton has been explicit, stating that the ICO market contains substantial fraud. He noted that currently, only a few cryptocurrencies like Bitcoin, which function purely as exchange mediums, fall outside securities regulations. Most other ICO tokens should be considered securities and subject to stricter监管.
Furthermore, hacker intrusions and malicious attacks on digital currency networks present notable risks. Exchange breaches affect liquidity and cause price volatility. Over the past four years, several exchanges have been shut down due to fraud, operational failure, or security vulnerabilities, often resulting in significant customer losses without compensation.
The Continued Global Regulatory Scrutiny
The SEC's rejection of multiple Bitcoin ETF applications reflects just one aspect of the broader regulatory landscape for digital currencies. Countries worldwide are accelerating their regulatory approaches.
Elina Sidorenko, an official from Russia's digital currency risk assessment department, recently revealed that Russian regulators are evaluating risks associated with digital currencies and will consider the interests of businesses and financial regulatory bodies in legislative reforms. New draft regulations are expected to clarify the rights, obligations, and responsibilities of participants in the digital currency industry, with proposals anticipated in the near future.
In May 2018, Russia's lower house of parliament passed three draft bills on cryptocurrencies: the "Digital Financial Assets Act," the "Bill on Attracting Investments Using Investment Platforms," and the "Digital Rights Act." These bills aim to provide legal definitions for terms like "digital currency," "digital financial asset," and "digital right."
Vietnam's State Bank (SBV) recently warned the public that digital currencies are not legal tender in Vietnam and prohibited their issuance, use, and supply. Violators face fines ranging from 150 million to 200 million Vietnamese Dong (approximately $6,500 to $11,000).
The European Parliament's Committee on Economic and Monetary Affairs submitted a proposal mid-month recommending new regulations for ICOs.
Japan's Financial Services Agency (FSA) is considering reforming the regulatory framework for its digital currency sector to curb speculative investment.
Additionally, South Korea's National Assembly will host a large-scale international conference on virtual currencies in September to discuss exchange and ICO regulatory schemes. New ICO regulations are expected within the year.
Amid this global regulatory tightening, Goldman Sachs has expressed a pessimistic outlook on the fate of cryptocurrencies. The firm's investment management group identified "cryptocurrency mania" as one of six factors contributing to market instability for the remainder of 2018.
Goldman Sachs reiterated a view from a report published earlier this year, stating that Bitcoin's rally toward $20,000 had made the internet bubble "pale in comparison." The firm argues that cryptocurrencies currently function neither as a medium of exchange, nor a unit of account, nor a reliable store of value.
UBS has issued similar assessments, calling Bitcoin too "volatile" to become a mainstream currency.
Mossavar Rahmani, Chief Investment Officer for Goldman Sachs Private Wealth Management Group, expects cryptocurrencies will not maintain their current value. "Cryptocurrencies are deflating much faster than we expected. We believe they fail to fulfill the three traditional roles of money. Consequently, we anticipate further declines in the future."
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Frequently Asked Questions
What is a Bitcoin ETF?
A Bitcoin ETF is an exchange-traded fund that tracks the price of Bitcoin. It would allow investors to gain exposure to Bitcoin's price movements through a traditional securities account without the need to directly buy, store, or secure the digital currency themselves.
Why does the SEC keep rejecting Bitcoin ETF applications?
The SEC has cited concerns about market manipulation, fraud prevention, and the overall size and liquidity of the underlying Bitcoin markets, particularly the futures markets that many proposed ETFs are based on. The regulator seeks to ensure investor protection is robust before approving such products.
What are the main risks of investing in cryptocurrencies?
Key risks include extreme price volatility, the potential for market manipulation, security vulnerabilities leading to exchange hacks or theft, regulatory uncertainty across different countries, and the prevalence of fraud in some initial coin offerings (ICOs).
How do countries differ in their approach to cryptocurrency regulation?
Regulatory approaches vary significantly. Some countries, like Japan, have moved toward licensing exchanges. Others, like China, have imposed strict bans on trading and ICOs. Many Western nations, including the U.S., are developing frameworks that treat certain cryptocurrencies as securities subject to existing laws.
Could a Bitcoin ETF ever be approved?
Many analysts believe eventual approval is likely as the market matures, surveillance-sharing agreements with major exchanges are established, and custodial solutions improve. However, the timeline remains uncertain and is contingent upon addressing the SEC's core concerns regarding market integrity.
What is the long-term outlook for blockchain technology?
Despite regulatory challenges for cryptocurrencies, the underlying blockchain technology is widely viewed as having transformative potential. It promises more efficient databases, faster transactions, and greater transparency. Many countries are investing in and developing regulations to foster blockchain innovation in various sectors beyond finance.