SEC Asks Direxion to Withdraw Bitcoin ETF Application

Direxion has requested the withdrawal of its proposed ETF that would have allowed investors to short bitcoin futures just days after Valkyrie pulled its leveraged bitcoin ETF application. 

The New York-based firm had filed last week for the Direxion Bitcoin Strategy Bear ETF, which planned to offer managed short exposure to CME bitcoin futures contracts. The fund would not invest directly in bitcoin. 

Grant Engelbart, a senior portfolio manager at Brinker Capital, told Blockworks at the time that the ETF would satisfy demand from active traders and short-to-intermediate-term investors who feel bitcoin is overvalued and would want to systematically short it. 

But the staff of the SEC’s Division of Investment Management requested that the filing be withdrawn for reasons cited in former Division of Investment Management Director Dalia Blass’s January 2018 letter, according to an SEC disclosure filed on Tuesday.

The nearly four-year-old letter, titled “Engaging on Fund Innovation and Cryptocurrency-related Holdings,” notes that there are investor protection issues – such as liquidity, potential manipulation and valuation challenges – that need to be examined before sponsors begin offering crypto-related funds to retail investors.

“The trust intends to engage in an informal discussion with the staff regarding the proposed fund and to seek effectiveness via a subsequent amendment to the registration statement as soon as is practicable,” the filing by Direxion states.

Spokespeople for Direxion and the SEC did not immediately respond to Blockworks’ requests for comment. 

The withdrawal request comes just days after fund group Valkyrie withdrew its application to launch an ETF that would have provided 1.25x exposure to the bitcoin reference rate and held futures, swaps, options and forwards.

Bitcoin futures-based ETFs began trading last month with the launch of ProShares’ Bitcoin Strategy ETF (BITO) on Oct. 19. Valkyrie’s Bitcoin Strategy ETF (BTF) made its Nasdaq debut three days later.

Some industry professionals have said that the bitcoin futures ETF approvals should result in the SEC’s approval of the Direxion and Valkyrie offerings, as well as the various physically backed bitcoin ETFs that await the ability to launch. 

US Reps. Tom Emmer (R-Minn.) and Darren Soto (D-Fla.), wrote a letter to SEC Chairman Gary Gensler on Wednesday noting that the agency allowing bitcoin futures ETFs should mean it will permit physically backed bitcoin ETFs to begin trading. 

“Considering the SEC’s clear articulation of how concerns over fraud and manipulation in the bitcoin markets can be addressed,” they wrote, “we do not understand the SEC’s views around the perceived material difference in risk profiles, since both the futures and spot bitcoin markets are inherently intertwined and bear the same risks regarding fraud and manipulation.”

The Direxion and Valkyrie withdrawals are not the only crypto ETFs to be pulled recently. After filing for bitcoin futures ETFs, fund managers ProShares and VanEck each filed to launch Ethereum futures ETFs. The two firms subsequently sought to withdraw those applications two days later.