Solidx’s Attempt to Disqualify SEC’s Bitcoin ETF Decision Fails

The U.S. Securities and Exchange Commission (SEC) has announced its decision to disapprove the proposed rule change filed by NYSE Arca to list and trade shares of Solidx Bitcoin Trust. This move came after Solidx Management LLC, the sponsor of Solidx Bitcoin Trust, submitted a comment letter to the Commission, attempting to differentiate the NYSE Arca’s situation from that of Bats BZX Exchange.

Also read: Examining SEC’s Decision to Reject Bitcoin ETF

Solidx Says Bats’ Rejection Does Not Apply

On March 10, the SEC made the decision to reject the listing of Coin on Bats BZX Exchange. The Commission primarily cited the main reasons as the lack of “surveillance-sharing agreements with significant markets for trading” of bitcoin and its finding that “the significant markets for bitcoin are unregulated”.

In an attempt to preemptively dissuade the SEC from using the same reasons to reject Solidx Bitcoin Trust, on March 15, its sponsor sent a comment letter to the Commission. Solidx Management LLC got straight to the point and claimed that the SEC’s decision to reject Bats BZX Exchange’s proposed rule change for Coin “should not apply to the proposed rule change by the NYSE Arca”.

The reason which Solidx Management gave is that “the NYSE Arca proposed rule is designed to prevent fraudulent and manipulative acts and practices and will promote investor protection and the public interest and is therefore consistent with Section 6(b)(5) of the Exchange Act”.

‘Surveillance is Not an Appropriate Prerequisite for the Approval’

The company acknowledged that the Commission abundantly cited how “surveillance sharing agreements provide an important deterrent to manipulation” throughout the Bats BZX Order.

While arguing that “the investor harm from potential manipulation is hypothetical in nature and unlikely”, Solidx Management asserted that “the harm to investors from a lack of access to an insured vehicle is overt and likely to continue in the absence of approval of the NYSE Arca proposed rule change”.

Moreover, the company wrote that an approval “would be in direct contravention of Section 6(b)(5)’s goal and purpose to protect investors and the public interest”, adding that:

It would undoubtedly be to the detriment of investors if the Commission were to prioritize surveillance agreements over protecting investors from ongoing losses related to hacking, errors and other operational hazards associated with direct bitcoin ownership.

In addition, it pointed out a precedence when the SEC approved a rule change for the ‘Euro Currency Trust’ in November 2005 where the underlying market was not surveilled. However, the Commission said that the circumstances surrounding the Euro Currency Trust were very different from those of Solidx Bitcoin Trust.

Bitcoin Markets Resilient to Manipulation

Throughout the Bats’ rejection order, the SEC asserted that bitcoin markets can be manipulated. While citing the Lewis Paper which it commissioned, Solidx Management claimed that “the bitcoin market as currently structured is resilient to manipulation”. In addition, it said that NYSE Arca’s proposed rule change “is designed to strengthen the bitcoin market’s resistance to manipulation even further”. The company also noted that:

The Trust [Solidx] may actually reduce the potential for fraud or manipulation of bitcoin.

As icing on the cake, Solidx Management told the SEC that “the requirements of Section 6(b)(5) concern the shares of the Trust and not bitcoin”. It then explained that “when shares of the Trust begin to trade on the NYSE Arca, the rules of the Exchange, as such rules will be applied to shares of the Trust, will indeed prevent fraudulent and manipulative acts and practices and protect investors and the public interest”.

Comments Specifically Attack Coin ETF

Furthermore, Solidx Management stated that “the public comments referenced by the Commission in the BZX Order are littered with hyperbolic personal attacks directed explicitly at the Winklevosses. Other comments disparage the Gemini exchange, including its trading volumes and pricing mechanisms”.

The company then proceeded to claim that “none of the comments, however, focus on investor protection and the public interest, and none, nor do they relate to the SolidX Bitcoin Trust”. As of March 24, the SEC has received 11 comment letters for this proposed rule change. The company told the Commission that:

With the exception of one commenter, all the comments concerning the Solidx Bitcoin Trust are positive, and highlight that shares of the Trust will promote investor protection and the public interest and prevent fraudulent and manipulative acts and practices.

Denied by the SEC Anyway

Nonetheless, the SEC did not wait until the deadline, on March 30, to reveal its decision to reject NYSE Arca’s proposed rule change for Solidx. Its announcement on the morning of March 28 cites the same reasons given for rejecting Coin. The SEC wrote that:

“The Commission is disapproving this proposed rule change because it does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest”.

Do you think Solidx Management made a good attempt at disqualifying the SEC’s previous decision? Let us know in the comments section below.

Images courtesy of Shutterstock, NYSE, Bats Global Markets, and Solidx

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