Securities and Exchange Commission (SEC) has turned down plans by representatives of two Wall Street trade groups to set up exchange-traded funds (ETFs) for bitcoin and other cryptocurrencies, essentially beating off the idea for now.
The act was laid out in a letter which was sent by Dalia Blass, director of the SEC’s investment management division, to the Investment Company Institute and Securities Industry and Financial Markets Association. The SEC actually said there were too many questions which were not answered to allow for cryptocurrency ETFs without creating extra risks for investors.
The SEC already blocked the production of a bitcoin ETF by the Winklevoss twins, Tyler and Cameron, last year.
A cryptocurrency ETF would let people to invest in virtual coins without owning them directly instead they would own shares in the ETF, which owns the coins and could therefore see their investment grow if the value of the cryptocurrencies held appreciates.
Rich investors already can buy and sell cryptocurrencies directly, but ETFs, which have become more famous in recent years due to their low management fees and the fact they they can be bought and sold during the trading day, would open the same opportunity to more people with brokerage accounts.
“Recently, the growth in cryptocurrencies and cryptocurrency-related products has attracted significant attention, and we have seen interest among sponsors in offering registered funds that would hold these new digital products,” the SEC wrote. “We ready to engage in dialogue with sponsors regarding the potential development of these funds. We believe, however, that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors.”
The first tranche of questions which are not answered related to the valuation of the funds. What happens if the cryptocurrency “forks” into two branches? If the newly-created fork automatically gives people “coins” equivalent to their holdings in the original cryptocurrency as happened with the creation of Bitcoin Cash and Bitcoin Gold and how would the fund account for those new holdings?
And if there’s potential market control moving on, how might that have an impact on the settlement price of cryptocurrency futures?
Liquidity is also an issue, given the notorious volatility of cryptocurrency markets. For example, if the market is crashinging and investors want to pull out, would the funds have enough cash on hand to allow them all to do so?
The SEC also has big questions about how fund assets would be protected in the case of a big digital wallet hack, a depressingly regular occurrence.
“Until the questions identified above can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products, and we have asked sponsors that have registration statements filed for such products to withdraw them,” the SEC said.