Investors hoping for a crypto ETF to be passed this year have seen those hopes diminished after new comments from SEC leadership in recent days.
First, new SEC chairman Gary Gensler sat down for an interview with CNBC’s “Squawk Box,” in which he sounded several alarm bells about the safety of crypto markets.
Then yesterday afternoon, the SEC’s Division of Investment Management released a public statement warning investors about the risks associated with open-end funds investing in Bitcoin futures.
“Greater Investor Protection” Needed
In his CNBC interview, Gensler made clear that he believes more investor protections and regulations are needed.
He also signaled that the SEC would be a major player in deciding the fate of the crypto asset class. “To the extent that something is a security, the SEC has a lot of authority. And a lot of crypto tokens — I won’t call them cryptocurrencies for this moment — are indeed securities,” he said.
Elaborating on Bitcoin specifically, Gensler expressed his concerns about the lack of protections for investors: “It’s a digital, scarce store of value, but highly volatile. And there’s investors that want to trade that, and trade that for its volatility, in some cases just because it is lower correlation with other markets. I think that we need greater investor protection there, adding that he considers Bitcoin to be a ‘speculative’ store of value.
Not having investor protection in the crypto markets is “a gap in our system right now” that should be addressed by some sort of “federal regime” that is currently lacking, said the head of the SEC.
Regulatory frameworks for stocks and bonds that were built in the 1930s to protect investors from manipulation and fraud are still in place today. Gensler hopes to work with Congress “if they see fit, to try to bring some protection for people that want to invest in this speculative asset class.”
He also went on to state that he believes the SEC should remain “technology neutral” when it comes to market innovations.
Should Open-End Funds Invest in Bitcoin Futures?
Meanwhile, the Division of Investment Management echoed Gensler’s warnings in a public statement that warned investors looking to invest or gain exposure to Bitcoin via Bitcoin futures.
“Investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment. As such, investors should consider the volatility of Bitcoin and the Bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying Bitcoin market,” wrote the staff.
The Division of Investment Management, along with the Division of Examinations, will be closely monitoring mutual funds that are investing or that intend to invest in Bitcoin futures to ensure compliance with the Investment Company Act of 1940.
They also will be monitoring “the impact of mutual funds’ investments in Bitcoin futures on investor protection, capital formation, and the fairness and efficiency of markets.”
In doing so, they will also be evaluating if the Bitcoin futures market is able to “accomodate ETFs which, unlike mutual funds, cannot prevent additional investor assets from coming into the ETF if the ETF becomes too large or dominant in the market, or if the liquidity in the market starts to wane.”
ETF Trends director of research Dave Nadig told Bloomberg about the comments: “There’s zero chance any existing filing goes through with no modifications whatsoever. I’m still thinking this year, but honestly, who knows. It could be tomorrow or never.”
Eric Balchunas, senior ETF analyst for Bloomberg, agreed, writing in a tweet yesterday that “2021 isn’t dead yet, but it just took a nasty blow to the head.”
There are currently 9 cryptocurrency ETFs before the SEC, with four of them under official review.
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