SEC cools traders’ hot plans for cryptocurrency-based exchange traded funds

The U.S. Securities and Exchange Commission has serious concerns about the securities industry’s plans to create exchange traded funds around cryptocurrency.

In a strongly worded letter to the heads of the Securities Industry and Financial Markets Association and the Investment Company Institute, the director of the division of investment management, Dalia Blass said that there were “significant outstanding questions” around how funds that held large amounts of cryptocurrencies (and related products) would satisfy the necessary regulatory requirements.

In the letter Blass identified a number of areas of concern for the regulatory agency including the valuation of underlying cryptocurrency assets held by mutual funds or exchange traded funds; the actual liquidity of the assets that these funds would hold; the institutions that would provide custodial oversight for the assets; and the exposure of the assets to both market manipulation and trading arbitrage.

Blass writes:

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 collapse of prices of many digital currencies earlier this week underscore the regulator’s point about the currency’s volatility, and the SEC has raised concerns about the potential for market manipulation of currencies earlier this year.

Indeed, we reported earlier this week that the spike in the price of bitcoin from $150 up to $1000 in late 2013 was likely due to manipulation by major holders of the cryptocurrency, according to a report in the Journal of Monetary Economics.

And the shenanigans at Bitconnect, which shut down after several DDOS attacks, two criminal probes and a heaping pile of bad press denouncing the company for the ponzi scheme that it was purported to be, can’t have helped the industry’s case.

This isn’t the first time the SEC has halted plans for exchange traded funds based on cryptocurrencies. Back in March of last year, the commission blocked an application put forward by the Winkelvoss twins, as the Wall Street Journal reported at the time. 

At the time, the commission said that bitcoin was not regulated tightly enough and there wasn’t enough clarity into the operations of the various exchanges that traded bitcoin to grant approval.

While the SEC has ruled out exchange traded funds that hold cryptocurrencies, regulators have not barred all types of exposure to cryptocurrencies through exchange traded funds. Indeed two funds just launched which are pitching investments in companies that have exposure to cryptocurrency (I’m not linking to them because at this point, there’re far too many charlatans that have jumped on the crypto — and blockchain — bandwagon).

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