After declining the approval of the Winklevoss twins' Bitcoin ETF, the SEC has recently rejected the proposal of NYSE Arca to list and trade SolidX’s Bitcoin Trust. NYSE Arca is the first all-electronic exchange in the United States and has more than 8,000 exchange-listed securities. In Europe, similar developments took place.
The European Central Bank (ECB) has concluded that Blockchain or distributed ledger, the technology that Bitcoin operates on, will not be considered as an option for Eurosystem’s financial framework. Are these rejections from regulators setbacks for Bitcoin and Blockchain?
“Must be regulated”
“The Commission believes that, in order to meet this standard, an exchange that lists and trades shares of commodity-trust exchange-traded products (“ETPs”) must, in addition to other applicable requirements, satisfy two requirements that are dispositive in this matter. First, the exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or derivatives on that commodity. And second, those markets must be regulated.”
“Not mature enough”
In Europe, the reasoning for not adopting Blockchain for Eurosystem’s financial framework by the European Central Bank is:
“There are also a number of functional, operational, governance and legal aspects that need to be carefully weighed before considering the mass adoption of new technologies. At this stage of its development, DLT is not mature enough and therefore cannot be used in the Eurosystem’s market infrastructure.”
Chicken and egg problem
It is interesting that the lack of regulation or maturity is cited as reasons by regulators for not approving Bitcoin-based financial products and for using Blockchain technology.
However, it is the same financial institutions that refuse to regulate these technologies.
It is basically now a chicken and egg question, where we have entered a vicious cycle which needs to be broken by a leap of faith.
If they are not willing to regulate or trust the “unregulated” technology, things can’t move forward.
It is not that these regulators do not appreciate the benefits of distributed ledger technology (DLT).
As the ECB says in its publication: “If individual market participants use DLT mainly to improve their internal efficiency, the effect on the financial ecosystem will be more limited than in a scenario where a group of core market participants adopt the new technology. A more revolutionary scenario is a peer-to-peer world without any financial intermediaries.”
The ECB and the SEC seem to have taken a wait and see approach to Bitcoin and Blockchain.
The SEC goes on to say: “The Commission notes that bitcoin is still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop. Should such markets develop, the Commission could consider whether a bitcoin ETP would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act.”
While this does leave the door open, the fact is that it may be too late for these regulators and the underlying financial institutions. The world is ready for a new financial system, which is decentralized and where access to wealth is far more democratic than in the system that exists today. It would be prudent for the regulators to take stock.