Bitwise Pushes Back Against SEC Rationale for Rejecting Bitcoin Spot ETFs

Bitwise filed an amendment to its Bitcoin spot ETF application on Monday to include fresh arguments it says invalidate regulators’ explanations for depriving American investors of the product.

The firm asserted that the CME Bitcoin futures market leads the spot market in Bitcoin’s price discovery, for example, and may thus serve as a “regulated market of significant size” for market surveillance purposes.

“We try to… demonstrate that every well-designed academic study supports the finding that the CME is ‘significant,’” said Matthew Hougan, CIO of Bitwise, on Twitter.

Bitwise is among nearly a dozen firms aiming to launch a Bitcoin spot ETF in the United States, although all of them have been consistently denied the ability to do so by the nation’s Securities and Exchange Commission (SEC).

The agency’s primary argument is that the CME Bitcoin Futures market isn’t large nor related enough to Bitcoin’s spot market to counteract a would-be manipulator trading on the exchange.

Bitwise claims, however, that Bitcoin’s price is dictated more by the futures market than the SEC believes. According to a previous Bitwise study cited by Hougan, trading volume within Bitcoin’s spot market may be mostly fake—meaning the relative size of its futures market is much larger.

In 2021, another Bitwise study found that CME futures accounted for 52.97% to 68.03% of Bitcoin’s price discovery, proving its relevance sufficient for a surveillance-sharing agreement. While the SEC argued that this doesn’t explain why the CME is needed to address manipulation, Bitwise says the answer is self-evident.

“The sponsor’s answer can only be that 50% is the uniform academic standard across every price discovery paper the sponsor has reviewed, as well as all academic papers the commission has referenced,” Bitwise wrote in its filing.

“If the commission believes that the standard for satisfying the first prong should be higher than ‘leads’ (such as, ‘overwhelmingly leads’ or ‘nearly always leads’), then the commission should state that,” it added.

The SEC lost its lawsuit with Grayscale in August after the latter accused the agency of arbitrarily refusing its Bitcoin spot ETF application while approving futures ETFs. While boosting investor confidence, Hougan said that solid arguments related to CME futures’ relationship with spot prices are needed if the SEC appeals the court ruling.

“In short, we return to the status quo,” wrote Hougan. “Unfortunately, existing filings do not include substantively new arguments or research addressing this question head-on—until now.”

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