04.03.2019
By Rob Daly

OPINION: Pranks Don’t Help Bitcoin ETFs

No matter how close the US Securities and Exchange Commission was to approving a bitcoin-based exchange-traded-fund, the April Fools shenanigans of crypto website Finance Magnates likely dashed much of that progress.

The news site reported on March 31, that the SEC approved the creation of bitcoin ETFs during an emergency meeting the day before and that longer suffering VanEcks and Bitwise would launch such funds in early May.

Crypto investors, upon hearing the news, plowed into the market and increased bitcoin’s price by approximately 50 percent on Monday.

How much flesh-and-blood traders drove the volume versus trading algorithms that could not identify uncorroborated news on April Fools Day is not known, but the smart money is on the latter.

The prank only demonstrated the regulator’s concern regarding how easily forces can manipulate the cryptocurrency markets.

The publication should be happy that bitcoin is a spot commodity market rather than a security. Had it been, those behind the prank easily would have been facing market manipulation charges.

It is tough enough for the SEC to wrap its arms around cryptocurrency and crypto assets, but is slogging ahead. It hired Valerie Szczepanik as a senior adviser for digital assets and innovation in June 2019. More recently, the Division of Trading of Markets issued a hiring notice for a crypto and digital assets specialist.

Until the Division fills the position and the new hire gets up to speed, it is doubtful that the regulator would take any action to approve bitcoin ETFs.

Another market-structure issue that may provide a hint of the SEC’s intention is the ETF-reform recommendation that its Fixed Income Market Structure Advisory Committee has presented to the regulator.

The subcommittee on ETFs and bond funds suggested that the SEC introduce two new exchange-traded products beyond the exchange-fund and the exchange-traded note.

One would be exchange-traded instruments, which would be “registered investment companies and have embedded structural features that will not track the full unlevered positive return of the underlying index or exposure over a specific period of time.”

The more interesting product from a cryptocurrency perspective would be exchange-traded commodities, which “are not registered investment companies under the 40 Act nor subject to 6c-11, and would be listed using different exchange rules than 40 Act funds.”

The beauty of the ETC is that the SEC would have a blank slate on which to write listing requirements that could include cryptocurrencies and other crypto commodities without falling afoul of existing ETFs requirements.

If the regulator decided to follow this path, the market would still need patience while the SEC hammers out the new requirements.

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