We’ve received some guidance from the SEC regarding cryptocurrency/Bitcoin ETFs. The market has been anxiously waiting for some good news regarding SEC Bitcoin ETFs and today’s news might put a damper on those expectations. Exchange-traded funds, or ETFs, have been cited as a catalyst necessary for a bull run in the cryptocurrency markets. We might have to wait a little while longer.
Jay Clayton, the Securities and Exchange Commission (SEC) Chairman, has a few worries that he would need to see addressed before he’s comfortable approving the investment vehicle. What’s the first one?
Most cryptocurrency exchanges don’t use the same monitoring tools as stock exchanges – this is one of the reasons why arbitrage is more rampant in cryptocurrency than other traditional financial institutions. Because of this, investors may not get a fair assessment of Bitcoin’s price.
“What investors expect is that trading in the commodity that underlies that ETF makes sense and is free from the risk of manipulation,” Clayton said at the Consensus Invest Conference in Manhattan. “It’s an issue that needs to be addressed before I would be comfortable.”
Traditional investment exchanges like the NYSE and the Nasdaq have what’s known as “surveillance,” or systems that monitor, prevent, and investigate abusive and manipulative activity on the exchanges.
“Those kinds of safeguards to not exist currently in all of the exchange venues where digital currencies trade,” Clayton said.
There are niche examples, however, of progress being made towards this. In April, Nasdaq announced a collaboration with Gemini, a digital currency exchange founded by the Winklevoss twins. The deal gave Gemini access to Nasdaq’s surveillance tech to help strengthen and provide equity for the Gemini platform. The deal also allowed for Gemini to provide a fair and “rules-based marketplace” for its customers, according to Tyler Winklevoss, Gemini’s CEO.
ETFs track an index or group of assets but trade like stocks. Cryptocurrency analysts say the approval of a Bitcoin ETF could bring in a wave of institutional buyers and because Bitcoin has a fixed and finite supply, it could theoretically push up prices.
The SEC has rejected multiple applications for a cryptocurrency ETF. Even the Winklevoss brothers have been rejected by the SEC – they were rejected due to the risks of fraud and market manipulation and the rising challenge to protect investors.
Safely storing cryptocurrency is still proving to be a major roadblock, especially from the perspective of protecting investors. The volatility of Bitcoin and cryptocurrency is not the only form of protection needed for investors – the assets themselves could be stolen.
“We’ve seen some thefts around digital assets that make you scratch your head,” Clayton told Silver Lake Partners’ Glenn Hutchins, who moderated the panel. “We care that the assets underlying that ETF have good custody, and that they’re not going to disappear.”
Market solutions have already been answering Clayton’s concern – Fidelity announced in October that it was launching a separate company to handle cryptocurrency custody.
Other companies like Coinbase, Gemini, BitGo, Ledger, and ItBit are also working on custodial products and solutions that can better protect investors and their assets. Fidelity is the biggest US-based company that’s tackling this issue.
Despite these burgeoning options, Clayton said that custody offerings still “need to be improved and hardened.”
Chances are your ICO is a security
Clayton also wanted those offering ICOs to know something: chances are, your project is subject to SEC laws.
“You should start with the assumption that you’re starting with a securities offering,” Clayton said.
In June, Clayton made it clear that the agency will not bend the rules or make exceptions for cryptocurrency when it comes to defining what is or what isn’t a security. He told CNBC at the time that the US had built a $19 trillion securities market that’s “the envy of the world” following the current rules. The implication is that the cryptocurrency market will be just fine with the same rules and regulations that traditional securities follow today.
The SEC has said explicitly that Bitcoin and Ether are treated as commodities and therefore aren’t subject to the Howey Test. But all other cryptocurrencies are still seen by the SEC as securities and need to register with the SEC.
What do you think? We know Bakkt has been delayed until January. But it seems like progress, however slow it may be, is being made on a Bitcoin ETF. Do you think we’ll see an end to the bear market once that happens? Let us know what you think on our Facebook page!