The United States Securities and Exchange Commission (SEC) recently disclosed the next steps in its evaluation process for the proposed Bitcoin exchange-traded funds (ETFs) from Franklin Templeton and Hashdex. The regulatory agency has invited written comments on both proposals, seeking input on whether to approve or deny the applicants’ Forms 19b-4.
SEC invites the public to comment on the Bitcoin ETF proposals
SEC Form 19b-4, distinct from Form S-1, serves as a public disclosure approved by the SEC Trading and Markets Division. The forms have a 35-day open period from publication in the Federal Register, allowing stakeholders to express their opinions and provide responses to comments. The rule change applications, enabling the trading of these ETFs, were submitted in late September, with the Hashdex ETF destined for the New York Stock Exchange Arca and Franklin Templeton’s on Cboe BZX.
Recognizing the significance of the decision, the SEC extended its deadline for reviewing these applications until November 15. The SEC’s inquiries primarily focus on key issues surrounding potential ETF approval. Commenters are encouraged to assess the susceptibility of the funds to manipulation and evaluate the size of the exchanges set to host them. For Franklin Templeton, additional considerations include an examination of potential price manipulation in the Bitcoin market.
Commenters are prompted to scrutinize the company’s surveillance-sharing agreement with Coinbase, a collaboration intended to facilitate price discovery and enhance the ability to detect manipulation and fraud. Furthermore, the SEC is interested in understanding the correlation between Bitcoin spot and futures prices in the context of Franklin Templeton’s proposal. Hashdex’s proposed fund structure introduces additional complexity. The Hashdex Bitcoin ETF is designed as a futures ETF that holds spot Bitcoin.
Hashdex’s Unique approach and regulatory calculations
Unlike Franklin Templeton, Hashdex relies on acquiring Bitcoin from various exchanges on the Chicago Mercantile Exchange (CME) and foregoes a surveillance-sharing agreement with Coinbase. Commenters are specifically asked to evaluate the size of the CME about the fund structure and assess the anticipated liquidity. The SEC’s inquiries extend to the uniqueness of Hashdex’s approach, as it forgoes collaboration with Coinbase for pricing mechanisms. Instead, Hashdex exclusively relies on the CME for pricing.
Commenters are tasked with providing insights into whether the CME holds a significant size in the context of the proposed fund structure and whether sufficient liquidity will be available. Finally, stakeholders are invited to comment on Toroso Investments, the sponsor of Hashdex’s ETF, and its calculations regarding the relationship between Bitcoin prices on the CME and those on unregulated exchanges. Toroso Investments plays a pivotal role in managing and controlling the fund.
The SEC’s meticulous examination of these ETF proposals underscores the cautious approach taken by regulatory authorities in navigating the evolving landscape of cryptocurrency investment products. As the industry seeks to integrate digital assets into traditional financial markets, the SEC’s focus on potential manipulation, exchange size, and liquidity reflects a commitment to maintaining market integrity and investor protection.
The outcome of this evaluation process will undoubtedly have broader implications for the cryptocurrency market, influencing the regulatory environment and shaping the future landscape for Bitcoin and other digital assets within the realm of traditional financial instruments. Market participants, including investors, exchanges, and fund sponsors, await the SEC’s decision with keen interest as it unfolds against the backdrop of the evolving narrative surrounding cryptocurrency regulation in the United States.
