Up until about a week ago, a Bitcoin ETF in 2018 was looking more and more likely. In December, Bitcoin futures began trading on both the CBOE and CME, seemingly clearing the way for a possible Bitcoin ETF approval. The SEC doesn’t have regulatory oversight over physical Bitcoin, but it does over Bitcoin futures. Since dozens of ETFs use futures contracts, it seemed like the SEC would be comfortable giving a Bitcoin ETF the green light given enough time.
Then, the SEC spoke. On Tuesday, it pretty much shut the door on just about every Bitcoin ETF proposal that’s been made. Technically, the SEC asked each issuer to withdraw their filings, but the end result is the same. The SEC’s biggest concern with a Bitcoin ETF filing, it seems, is a potential lack of liquidity. There’s been increasing chatter in the regulatory world about how ETFs may be overpromoting liquidity in potentially illiquid asset classes. Bitcoin would certainly fall into the latter category, and the SEC is likely concerned that investors could be materially damaged by a sudden liquidity crunch and a potential inability to price crypto assets accurately. The collapse of the Third Avenue Focused Credit Fund provides a blueprint for what could happen in a worst-case scenario.
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