SEC Rejects Cryptocurrency ETFs (For Now)
February 14, 2018
The SEC Will Not Be Sanctioning Cryptocurrency ETFs Anytime Soon
The Securities and Exchange Commission will not be sanctioning cryptocurrency-based exchange-traded funds (cryptocurrency ETFs) anytime soon. According to the agency, there is still too much uncertainty surrounding Bitcoin and other virtual currencies.
SEC Prior Rejection of Bitcoin ETF
Last year, the SEC denied an application to create an ETF tied to the price of Bitcoin. In its decision, the agency cited the lack of regulatory oversight over the digital currency.
Tyler and Cameron Winklevoss, who are well-known supporters of Bitcoin, were behind the ETF at issue. Bats BZX Exchange filed a proposed rule change to list and trade shares of the Winklevoss Bitcoin Trust. The ETF would have allowed the public to invest in Bitcoin by purchasing shares in the fund, which would trade on the exchange.
After soliciting public comments on the application, the SEC denied the proposed rule change, concluding that it “does not find the proposal to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”
SEC’s Latest Rebuff of Cryptocurrency ETFs
In a letter to the Investment Company Institute and Securities Industry and Financial Markets Association, Dalia Blass, director of the SEC’s investment management division, clarified the agency’s position on ETFs linked to cryptocurrencies. According to the SEC, it does not believe that “it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products.” Accordingly, it has asked sponsors that have registration statements filed for such products to withdraw them. As Blass further explained:
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,” Bass wrote. “[We stand] 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 SEC staff letter highlighted a number of concerns, including liquidity, custody, and risk of manipulation. With regard to valuation, the SEC questioned how funds would address when the blockchain for a cryptocurrency diverges into different paths (i.e., a “fork”), which could result in different cryptocurrencies with potentially different prices. In terms of liquidity, the SEC queried how funds would take into account the trading history, price volatility and trading volume of cryptocurrency futures contracts, and whether funds would be able to conduct a meaningful market depth analysis in light of these factors. As for custody concerns, the SEC noted that it is not aware of a custodian currently providing fund custodial services for cryptocurrencies.
“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.
The SEC’s latest guidance is not the final nail in the coffin for cryptocurrency ETFs. It just means that they are still off the table at the moment. Until regulations keep up with the popularity of Bitcoin and cryptocurrencies, they remain extremely high-risk. Businesses considering opportunities involving cryptocurrency should continue to proceed with caution and consult with experienced counsel regarding the potential risks.
Facebook Bans Ads for Bitcoin and ICOs
The cryptocurrency market also recently took another hit when Facebook announced that it will prohibit advertisements that “promote financial products and services that are frequently associated with misleading or deceptive promotional practices, such as binary options, initial coin offerings and cryptocurrency.” Ads that violate the company’s new policy will be banned on Facebook’s core app, but also in other places where Facebook sells ads, including Instagram and its ad network, Audience Network, which places ads on third-party apps.
As Facebook explained, “We want people to continue to discover and learn about new products and services through Facebook ads without fear of scams or deception. That said, there are many companies who are advertising binary options, ICOs and cryptocurrencies that are not currently operating in good faith.”
The ban applies equally to legitimate businesses. “This policy is intentionally broad while we work to better detect deceptive and misleading advertising practices,” the social media platform stated. “We will revisit this policy and how we enforce it as our signals improve.”
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, at 201-806-3364.