SEC’s Chairman Jay Clayton Expects Some Key Upgrades Before Approving Bitcoin ETF
While Cryptocurrency enthusiasts are eagerly waiting for approval of the first-ever bitcoin exchange-traded fund, the Securities and Exchange Commission Chairman Jay Clayton states that the cryptocurrency market first needs to address a few worries of his, before the approval can be given.
Clayton elaborated on his worries at the Consensus Invest Conference in Manhattan. First on his list is the lack of market surveillance. As most cryptocurrency exchanges don’t use the same monitoring tools as stock exchanges, Clayton thinks the investors may not get a fair assessment of bitcoin’s price. He stated:
“What investors expect is that trading in the commodity that underlies that ETF makes sense and is free from the risk of manipulation. It’s an issue that needs to be addressed before I would be comfortable.”
The New York Stock Exchange and the Nasdaq have “surveillance,” systems that monitor, prevent and investigate abusive and manipulative activity on the exchanges. Clayton says:
“Those kinds of safeguards do not exist currently in all of the exchange venues where digital currencies trade.“
However, Nasdaq announced in April a collaboration with digital currency exchange Gemini, founded by early bitcoin investors Tyler Winklevoss and Cameron Winklevoss. The deal enables Gemini to employ Nasdaq’s surveillance technology so that the platform provides a fair and “rules-based marketplace” for their own participants.
ETF funds track an index or group of assets but trade like stocks. Analysts assume that an approval would bring in a wave of institutional buyers and because bitcoin has a fixed supply theoretically push up prices. Notably, SEC has rejected multiple applications for a cryptocurrency ETF and broadly cited the risks of fraud and market manipulation and the challenge of investor protection.
Issue with Custody
One of the major issue with the digital assets is storing them securely and safely. The price point of Bitcoin is certainly volatile, additional investors could also be exposed to a risk of theft in the underlying asset. Clayton told panel moderator, Silver Lake Partners’ Glenn Hutchins:
“We’ve seen some thefts around digital assets that make you scratch your head. We care that the assets underlying that ETF have good custody, and that they’re not going to disappear.”
The market already has dozens of cryptocurrency custody solutions. Fidelity announced in October that it will be launching a separate company to handle cryptocurrency custody and trade execution for institutional investors. Crypto companies Coinbase, Gemini, BitGo, Ledger and ItBit are among those already working on similar solutions.
In may, Japanese bank Nomura announced its plan to offer crypto custody, and Goldman Sachs and Northern Trust are reportedly exploring custodial services. But until Fidelity, there had been a noticeable lack of big U.S.-based incumbents officially entering the space. While the options are present in the market, Clayton said custody offerings still “need to be improved and hardened.”
Clayton also addressed the initial coin offerings issuers that, chances are, it’s subject to SEC laws as well. He says:
“You should start with the assumption that you’re starting with a securities offering.“
Clayton has already made clear in June, that the agency won’t bend the rules for cryptocurrency when it comes to defining what is or what isn’t a security. he told CNBC at the time that the U.S. has built a $19 trillion securities market that’s “the envy of the world” following the current rules.
“Howey Test,” dictates whether an asset is a security or not. A 1946 U.S. Supreme Court case classified a security as an investment of money in a common enterprise, in which the investor expects profits primarily from others’ efforts. According to the SEC bitcoin and ether are treated as commodities and therefore aren’t subject to that test. But all other cryptocurrencies are still seen by the SEC as securities and need to register with the agency.
Sec announced earlier in November, its first civil penalties against founders who did not register new coin offerings, adding to its crackdown aimed at abuses and outright fraud in the growing digital industry.
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