SEC won’t give green light for crypto ETFs
Questions posed around valuation, liquidity, custody, arbitrage and the potential for manipulation.
The US Securities and Exchange Commission (SEC) has advised that cryptocurrencies and related products pose “significant investor protection issues” and, for now, cannot be offered as exchange-traded funds (ETFs).
The notice was disclosed in a staff letter released on January 18, in response to two different Wall Street trade groups seeking interest in opening registered cryptocurrency funds to retail investors. ETFs aim to provide investors with a benchmark return at minimal cost, usually trade commission-free, according to Forbes.
The SEC’s letter, penned by SEC Division of Investment Management director Dalia Blass, proposed questions that the commission says must be answered in order for crypto-based funds to be properly considered. These questions explore valuation, liquidity, custody, arbitrage and the potential for manipulation and other risks.
“The innovative nature of cryptocurrencies and related products, as well as their expected use and utility in our financial markets, means that they are, in many ways, unlike the types of investments that registered funds currently hold in substantial amounts,” Blass wrote in the SEC’s Engaging on Fund Innovation letter.
Blass also questioned how funds holding substantial amounts of crypto would satisfy the Investment Company Act of 1940. This legislation covers hedge funds, mutual funds, private equity funds, and all holding companies.
Blass raised concerns about how funds’ would address issues when the blockchain for a digital currency diverges into different paths (a fork), possibly resulting in different cryptocurrencies with different prices.
The letter said that a key feature of open-end funds, such as mutual funds and ETFs, is daily redeemability.
“How would funds classify the liquidity of cryptocurrency… for purposes of the new fund liquidity rule? Would any of these products be classified as other than illiquid under the rule? If so, why?” Blass wrote.
“How would a fund intend to validate existence, exclusive ownership and software functionality of private cryptocurrency keys and other ownership records? To what extent would cybersecurity threats or the potential for hacks on digital wallets impact the safekeeping of fund assets under the 1940 Act?”
Earlier this month, the SEC sought the withdrawal of two other bitcoin ETF proposals, citing similar concerns.
A number of the world’s central banks, and the governments responsible for them, have called for tighter regulation of cryptocurrencies in order to prevent misuse, deter anonymous trading and boost transparency.
In September, two new security groups, a cyber unit and retail strategy task force, were established by the SEC to combat the growing threat of cyber crime violations and misconduct and better protect retail investors.
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