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On Friday (January 18th), American lawyer Jake Chervinsky, who is highly-respected in the crypto community for his excellent commentaries on how U.S. securities laws affect companies that deal with cryptoassets, decided to focus his attention on the VanEck-SolidX Bitcoin ETF proposal and how its approval/denial may (or may not) be affected by the current U.S. government shutdown (which began on 22 December 2018).
Chervinsky, an associate at the Washington, D.C. office of prestigious international law firm Kobre & Kim, as usual, was expressing his personal opinions via his personal Twitter account, and it is important to note that his tweets do not reflect the views of any past/present/future employer/client and should not be viewed as legal/financial advice.
The reason that Chervisnky took to Twitter to comment on this particular Bitcoin ETF proposal and how it might be affected by the current government shutdown is that he had noticed on Twitter "a lot of confusion & misinformation about how the shutdown affects the SEC and its process for handling ETF proposals."
Chervinsky started by reminding everyone that the final U.S. Securities and Exchange Commission (SEC) deadline for approval or disapproval of this particular ETF proposal is February 27th:
1/ As you probably know, the SEC's final deadline to approve or deny the ETF is February 27. That's 240 days after the ETF proposal was first published in the Federal Register.
— Jake Chervinsky (@jchervinsky) January 18, 2019
For more details on how the deadline calculation works, check out this thread:https://t.co/h6MsXO76mp
He then pointed out that this was a statutory deadline and what the implications of this fatct were:
2/ That 240-day deadline is imposed by federal statute—15 U.S.C. §§ 78s(b)(2)(A) & (B), to be exact (https://t.co/ynTcGwnTwR).
— Jake Chervinsky (@jchervinsky) January 18, 2019
Because the deadline is statutory, the shutdown doesn't affect it at all. The law continues to apply whether the government is funded or not.
3/ Also, the SEC doesn't have the power to extend the 240-day deadline. The statute absolutely prohibits any further delays.
— Jake Chervinsky (@jchervinsky) January 18, 2019
By law, that means if the SEC fails to make a decision by the February 27 deadline, the ETF will be automatically approved.
Next, he pointed out a very common misconception he had come across on Twitter:
4/ From these facts, the following narrative has emerged:
— Jake Chervinsky (@jchervinsky) January 18, 2019
- the SEC might be shut down longer than the February 27 deadline
- which means the SEC might not decide by the deadline
- in which case the ETF will be approved!
Sorry, but that's *extremely* unlikely.
Chervinsky points out that although the SEC is shorthanded right now, this does not mean that certain important functions are being ignored:
5/ It's true that the SEC has stopped nearly all of its work due to the shutdown & furloughed most of its employees (they have to stay home).
— Jake Chervinsky (@jchervinsky) January 18, 2019
That includes the majority of staff members in the Division of Trading & Markets, which handles proposed rule changes (including ETFs).
6/ But the SEC still has a small number of staff members available to handle "excepted" functions, which mostly refers to urgent law enforcement matters, but also includes "activities necessary for a short period in order to ensure an orderly shutdown of operations."
— Jake Chervinsky (@jchervinsky) January 18, 2019
7/ What activities are necessary to ensure an orderly shutdown?
— Jake Chervinsky (@jchervinsky) January 18, 2019
The SEC gets to make that designation for itself, and I'm willing to bet it thinks preventing controversial financial products like bitcoin ETFs from being auto-approved due to blown deadlines is "necessary."
8/ In fact, the SEC has *already* taken action during the shutdown to avoid missing deadlines on other proposed rule changes.
— Jake Chervinsky (@jchervinsky) January 18, 2019
For example, on January 9, the SEC issued an order extending its January 10 deadline on a rule change proposed by Nasdaq PHLX (https://t.co/sJjQUNYQ7r).
9/ So we know the SEC has a skeleton crew handling proposed rule changes during the shutdown.
— Jake Chervinsky (@jchervinsky) January 18, 2019
If the shutdown continues until February 27, that same crew should be around to issue an order approving or denying the ETF. The better question is whether anyone's around to write it.
10/ The staff shortage means the order might have less detail than usual. Maybe it's one page saying "[approved/denied] for reasons to be explained later." Or maybe it was written weeks ago & is totally standard.
— Jake Chervinsky (@jchervinsky) January 18, 2019
Regardless, there's no reason to think it can't get done in time.
But what if Chervinsky is wrong about his assumption that the SEC's "skeleton crew" will deal with the business of issuing an approval/disapproval order for this ETF proposal? Chervinsky, says, that if he is wrong, then one of two things must have happened, and explains what each of these scenarios means:
11/ If I'm wrong (it's possible), then one of two things has happened:
— Jake Chervinsky (@jchervinsky) January 18, 2019
#1: the SEC decided to approve the ETF anyway & preferred to allow auto-approval than to issue an order of approval during a shutdown.
#2: the SEC couldn't keep its skeleton crew on board to issue a denial.
12/ If #1 happens, fine, but the ETF was getting approved anyway.
— Jake Chervinsky (@jchervinsky) January 18, 2019
If #2 happens, it isn't likely to stay in effect for long. Automatic approval isn't a lifetime guarantee & can be undone easily. When the shutdown ends, the SEC can just force the ETF to be delisted.
Chervinsky next points out that if the government shutdown continues until February 27th, then it is extremely unlikely that we will see the Commission approve this proposal, and explains why:
13/ One last bit of bad news for the ETF bulls: if the shutdown continues to February 27, I think the ETF's chance of approval is near zero.
— Jake Chervinsky (@jchervinsky) January 18, 2019
I base that on the SEC's operations plan, which describes the functions that continue or stop during a shutdown (https://t.co/BkfhcE6YB0).
14/ On page 18, the operations plan talks about proposed rule changes. It says the SEC will discontinue "review and approval of applications for registration . . . with respect to new financial products."
— Jake Chervinsky (@jchervinsky) January 18, 2019
In other words, the SEC won't review or approve ETF proposals.
15/ If the SEC won't approve new ETFs, then obviously it must deny them all. And why not? It should be very comfortable with a position like:
— Jake Chervinsky (@jchervinsky) January 18, 2019
"The shutdown prevented us from completing our review, so we can't be sure that the requisite standards for approval have been met."
He concludes his commentary on the VanEck-SolidX Bitcoin ETF proposal by saying that contrary to what seems to be popular opinion, the current government shutdown cannot possibly improve the chances of this proposal getting approved by the SEC:
16/ Don't get me wrong: the ETF could still be approved, especially if the SEC made its decision before the shutdown started.
— Jake Chervinsky (@jchervinsky) January 18, 2019
All I'm saying is that the shutdown doesn't improve the ETF's chances of approval at all. In fact, the opposite is probably true.
As for the Bakkt's proposed Bitcoin (BTC) futures contract and the trading platform that will allow buying and selling of this new product, Chervinsky explains why the government shutdown will not influence the U.S. Commodity Futures Trading Commission (CFTC), the regulatory body that is dealing with Bakkt's application:
17/ And if you're about to ask how this all applies to Bakkt, it doesn't.
— Jake Chervinsky (@jchervinsky) January 18, 2019
Unlike the SEC, the CFTC has no statutory deadline for making a decision on Bakkt, so it can delay as long as it wants. Don't expect anything on Bakkt until after the shutdown (maybe months after).
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