Monday, December 5, 2022

Concerns Over Chinese Exchanges Partly Led to Bitcoin ETF Rejection

Concerns Over Chinese Exchanges Partly Led to Bitcoin ETF Rejection

Business practices at Chinese bitcoin exchanges were part of the reason the SEC rejected a bitcoin-based ETF, according to yesterday’s ruling.

The statement gave several reasons for concern surrounding bitcoin investments. However it seemed particularly concerned at a lack of oversight in China, which holds influence over the world bitcoin marketplace.

Also read: Bitcoin Price Plummets as SEC Denies Winklevoss Investment Fund

Majority of Bitcoin Trading Happens Outside US

In its 38-page ruling, the U.S. Securities and Exchanges Commission (SEC) referred to 59 letters it received during the official public comment period. Several commenters, it said, noted that the majority of bitcoin trading occurs outside the United States — namely, in China.

Major Chinese exchanges mostly define the bitcoin price and Chinese volumes dwarf those of non-Chinese trading platforms, the SEC wrote.

Not only that, it added, but China’s trading platforms are neither regulated nor audited. They are “suspected of engaging in unethical practices like front-running, wash trades, and trading with insufficient funds.”

One commenter said this meant the bitcoin price is “defined entirely by speculation, without any ties to fundamentals”. Another noted that the longstanding price disparity between Chinese and US bitcoin exchanges presented arbitrage opportunities that would not continue in efficient markets.

Weak know-your-customer (KYC) requirements on Chinese exchanges did not do enough to prevent tax evasion and money laundering. Fee-free trading also encouraged many U.S.-based users to use these platforms rather than local alternatives.

But Oversight Is Increasing in China

These days, it could be argued that Chinese exchanges are regulated to some degree. This is especially due to recent government inspections and suspension of exchange withdrawals in order to comply with new official requirements.

Edward Liu, co-founder of BitKan, a Shenzhen-based P2P bitcoin trading platform and data service, suggested concerns over business practices in his country might be outdated.

“The Chinese government is releasing strict regulatory measurements to avoid bitcoin crime and market manipulation. Now, Chinese bitcoin companies, including exchanges, are trying to follow these regulations. I don’t know if there is any relationship between Chinese government regulations and the ETF rejection, but I do have confidence in a better and healthier bitcoin industry/market.”

In any case, this new oversight in China came too late for the Bitcoin ETF. In taking comments from the public into considering when making its decision, the SEC may be judging bitcoin more on past activities rather than current reality.

SEC Still Has Other Concerns

However China was not the only reason the SEC’s commenters provided for their concerns about bitcoin. Others pointed out the market for bitcoin is shallow with high ownership concentration. With over 50% of all bitcoins in the hands of around 1,000 people, they said, the market could be more easily manipulated.

Unregulated exchanges in all countries were a primary concern, the SEC noted. Low liquidity and high volatility were some of the “fundamental flaws” that make bitcoin a “dangerous asset class to force into an exchange traded structure”.

Are the SEC’s comments still justified in today’s bitcoin market? Let us know in the comments.

Image via Pixabay

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