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This is not the first time the SEC rejects an ETF proposal

The US Securities and Exchange Commission (SEC) has rejected nine Bitcoin ETF applications including the much monitored ProShares Bitcoin ETF proposal on Thursday. Bitcoin prices changed little following the SEC decision, certainly because the decision was much anticipated by most market participants.

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This is not the first time the SEC rejects an ETF proposal and will certainly not be the last. In fact, the SEC is asked to regulate an investment vehicle, where the underlying assets are not regulated. Therefore, a favourable decision in the domain is unlikely in the close future.

The CBOE President Chris Concannon was already clear on the subject, when he stated that “given US investors are clearly already accessing these unregistered financial products, we also believe that investors are better served by products traded on a regulated securities market and protected by robust securities laws”, after the SEC rejected the Winklevoss brothers’ ETF proposal in late July.

Hence, Thursday’s rejection was not a shocker. Yet, the financial industry is not ready to let the idea of regulated ETFs go just yet.

Why are institutional investors craving for ETFs?

An Exchange Traded Fund (ETF) is a financial asset that tracks the performance of an index, a stock, a bond, a commodity or a basket of assets. Because ETFs are traded as stocks on common stock exchanges, the ETF traders benefit from many advantages such as lower fees and good market liquidity.

As mentioned earlier, one of the hottest topics among cryptocurrency investors is the creation of regulated ETFs. Many well-known funds and famous investors have recently come up with ETFs on Bitcoin and other cryptocurrencies to allow institutional investors such as pension funds, funds and hedge funds to take a larger part in the cryptocurrency market.

Why the institutional investors can not simply go to cryptocurrency exchanges and trade? Why are ETFs so appealing for this segment of the market?

First, because the market liquidity is important for institutional players. A good liquidity means a better flexibility in reshuffling portfolios and the possibility to implement efficient investment strategies. ETFs could be purchased and sold as stocks. Therefore, they are suitable investment instruments for taking and unwinding positions in cryptocurrencies without being subject to irregularities and issues that could be faced by trading the cryptocurrencies directly on decentralized exchanges. In addition, the ETFs may demand less in terms of transaction costs, especially if a portfolio of cryptocurrencies is available for diversifying risks.

Second, and perhaps the most important, the institutional players could include their ETF holdings in their balance sheets, in a similar way to cryptocurrency futures. It is otherwise not possible to book unregulated cryptocurrency holdings in an official financial statement.

Discussion: could and should ETFs be regulated?

ETFs are not the only way to include unregulated cryptocurrency holdings in financial statements. Futures could also be used to store financial value in official statements.

However, futures are significantly more volatile compared to the ETFs because they are not backed by physical assets. An ETF, on the other hand, is backed by physical assets; an Exchange Traded Fund is required to buy and hold the assets that it tracks.

Hence, one can argue that regulating the ETFs could provide a better alternative for attracting institutional funds to the cryptocurrency markets. But of course, it is more complicated than that.

First, the SEC will certainly not approve the cryptocurrency-backed ETF funds until the cryptocurrencies are regulated themselves.

Second, the cryptocurrency markets are still vulnerable to price manipulations. They are highly volatile. We are talking about high risk assets. It is not sure that the SEC would open the doors of a hectic market to big players, fearing that the consequences of wrong decisions could be dramatic. And the SEC is not completely mistaken: the valuation of cryptocurrencies remains quite uncertain, even more as the cryptocurrency markets are decentralized and the ETFs would need to rely on one exchange’s prices to value their assets. How precise and secure would that be?

Also, in the aftermath of a hectic trading year, nobody really knows where the cryptocurrencies’ fair prices are. There is sure an underlying technology which’s worth is reflected via the prices of cryptocurrencies, but the hectic price moves made it difficult to see clear whether the actual market prices are fair, or anywhere close to a fair value.

And finally, there is a certain opposition from the cryptocurrency pioneers themselves. The fact that the cryptocurrencies are being integrated with the traditional financial markets is a headache for the sector gurus, because it goes diametrically against the reason why cryptocurrencies were created in the first place: to create a peer-to-peer transaction network by removing the financial intermediaries out of the system. Bringing financial instruments/institutions in the game would have the opposite effect.In the future…

It is more likely than not that the cryptocurrencies will be regulated in the foreseeable future. The sector is too promising to be left aside and to survive it needs the contribution of institutional funds. For that, the sector needs to be part of a legal structure.

However, the regulation process will certainly be gradual. It is true that the potential approval of ETFs would give more legitimacy to cryptocurrencies, but there is little chance for the ETFs to be regulated before the cryptocurrencies.

 


Disclaimer: Crixfeed’s writer’s opinions are completely self-centered and do not reflect the opinion of Crixfeed. Any information you read on Crixfeed should not be taken as an investment advice, nor does Crixfeed support any project that can be mentioned or linked to in this article. Buying and trading Cryptocurrencies should be considered high risk activity. Please take care of your own before taking any action related to the material in this article. After all, Crixfeed should not take any responsibility to lose your cryptocurrency in currency trading.

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