09.27.2018
By Rob Daly

SEC Waits on Crypto ETF Guidance

The greatest barrier to the establishment of crypto-based exchange-traded products could be the Investment Company Act of 1940, according to Congressional testimony by the US Securities and Exchange Commission.

Dalia Blass, SEC

“We look at the product, what the sponsor want to bring to market, the law, work with them to see what issues there are under the law, and work with them to provide guidance while listening to their perspectives,” testified Dalia Blass, director of the Division of Investment Management, to the House Financial Services Committee’s Subcommittee on Capital Markets, Securities, and Investment. “This is what we do while keeping in mind our mission, which is investor protection, capital formation, and creating fair and orderly markets.”

Blass also noted that misused nomenclature often muddies much of the conversation regarding exchange-traded crypto-based products.

“An exchange-traded fund is an investment company that falls under the 40 Act,” she explained. “An exchange-traded product is a commodity pool that comes to market as a operating company. It is important to know the difference.”

Rep. Warren Davidson (OH-R) voiced his concern to Blass during her testimony that many on Wall Street and in the digital asset markets are concerned about the SEC’s transparency when it comes to guidance in creating crypto-based products.

“We are getting regulation by enforcement, or by rejection in this case,” he said. “But it is hard to discern what actually would meet the criteria.”

Blass testified that the SEC has approved more than 300 individual exemptive orders for ETF sponsors and that the 40 Act permits a vast amount of product innovation.

“Look at the innovation in the investment management space since 1940,” she said. “Amazing products have come to market and many have provided opportunities to the retail investor.”

Blass also stressed the amount of outreach to the asset management community the Division of Investment Management has done regarding cryptocurrency products.

The Division sent a staff letter to the Investment Company Institute and the Securities Industry and Financial Markets Association in mid-January requesting industry comments on issues, such as valuation, liquidity, custody and potential market manipulation of crypto-based exchange-traded funds and products as well as hosting a publicly accessible website for additional comments.

“The letter and website highlight issues funds should consider before bring its funds to market,” said Blass. “At this point in time, even though we issued the letter in January, they are just coming back to us with their responses.”

During his questioning, Rep. Davidson suggested that Congress just might need to update the 40 Act to address issues like custody for token-based products that have ledger entries available not only to the SEC but to anyone.

“Going through a duplication of effort to say that we have to tag a security that already has a ledger of who owns the account,” he said. “It would be like saying who really really owns this Fidelity account after Fidelity shows you who the owner is. Why pay a third party to tell you who owns the Fidelity account?”

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