SEC denies approval for Bitcoin Trust over multiple market integrity issues

By Christine Duhaime | March 11th, 2017

The Securities Exchange Commission has denied an application for the creation of a Bitcoin Trust based primarily on issues related to preservation of the integrity of the capital markets.

The decision is what was expected from a financial crime and integrity perspective.

The decision can be read here. The gist of the negative findings of fact that formed the basis of the decision are that:

  • There is no regulation or oversight for the worldwide market of exchanges used to trade Bitcoin; 
  • There are few (if any) Bitcoin exchanges anywhere that are regulated for fiduciary and custodial activities);
  • The price of Bitcoin is dominated by activities in China; and
  • The bulk of trading of Bitcoin occurs outside of the US where there is no regulation in place.

It remains true that Bitcoin can be bought, sold and transacted upon with complete anonymity and thus, its activity is inconsistent and irreconcilable with the obligations for transparency and integrity of the capital markets.

Unless we are dealing with a closed micro exchange (which no one has yet established), it is impossible in an environment of anonymous wallet holders, to comply with anti-money laundering and counter-terrorist financial law, or sanctions law.

Bitcoin exchanges have also said on many occasions that they are unable to freeze any account of Bitcoin that is suspected, or know to be, terrorist property because they allege that only a holder of a Bitcoin wallet can access and control its activities. For example, they go further and allege that if a private key is lost by a wallet holder, there is no way to recover the funds invested to buy Bitcoin, and thus, for capital markets, this also an impediment to market regulation as it results in unjust enrichment of the Bitcoin exchanges and it makes the exchanges incapable of complying with terrorism and sanctions laws prohibiting the dealing of terrorist property.

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