Jay Clayton of the Securities and Exchange Commission has made further comments about cryptocurrency ETFs, which his agency has so far refused to approve.
Speaking at the Consensus Invest Conference in Manhattan, he basically said that the underlying market is not yet developed enough to support this product.
This itself is not new. When the SEC rejected the Bitcoin ETF proposed by the New York Stock Exchange in August, it explained that the market would be under significant threat of market manipulation because the underlying asset – Bitcoin futures – is not adequately supervised. In addition to this, this product is only traded in two places – CME and CBOE – which does not a stable market make.
Clayton was asked by a CNBC reporter if now, six months down the line, the Bitcoin futures market is considered developed enough to support a dependant ETF. He responded that questions still need to be answered – can the pricing be relied upon, and can the assets be verified?
He added that the SEC has been very clear with its stipulations, and does not intend to lower its standards: “Those hurdles are the hurdles that we think a main street investor expects if they’re gonna invest in a product. I understand that there’s a great deal of discussion about these crypto assets, but we’re not going to relax our rules based on the level of discussion. We need to know that the pricing is certain, we need to know that the assets are there, we need to know that it’s going to function as our retails investors would expect those products to function.”
“We need to know that the assets are there”
Exchange-traded funds are investment funds based on an asset and managed by a central entity. Investors purchase shares but do not own the asset.
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In some cases, proposed Bitcoin ETFs have as their underlying asset not Bitcoin, but the Bitcoin futures market. Bitcoin futures, which the SEC approved last year, are another kind of financial derivative which are purely speculative; investors never actually purchase the underlying Bitcoin. So the asset upon which a Bitcoin ETF would be based would itself be an unstable, speculative market.
This is what Clayton means when he says that the assets might not be there. “Those kinds of safeguards do not exist currently in all of the exchange venues where digital currencies trade,” said he.
The regulator has shot down Bitcoin ETF proposals from the Winklevoss brothers and from NYSE Arca, a subsidiary of the New York Stock Exchange, for this reason. In contrast, VanEck and SolidX proposed a Bitcoin ETF based on actual bitcoins. This attempt is still being evaluated.
Said Clayton: “We care that the assets underlying that ETF have good custody, and that they’re not going to disappear.”
“A securities market that’s the envy of the world”
He also made it clear that he would not support the changing of securities laws to accommodate ICOs: “We’ve been doing this for a long time, and built a $19 trillion economy, a securities market that’s the envy of the world, following these rules. If you have an ICO or a stock, and you want to sell it in a private placement, follow the private placement rules… if you want to do an IPO with a token, come see us, file financial statements, file disclosure, take the responsibility our laws require and we’re happy to help you make the public offering.”
Specifically, he agreed with the CNBC reporter’s definition of a security as a common enterprise, centrally managed, and invested in with an expectation of profit.
“We are not going to do any violence to the traditional definition of a security, which has worked well for a long time, and I believe will continue to work well,” he said.