Saturday, 20 January 2018
Bitcoin

Bitcoin and Regulators: An Awkward Dance


Bitcoin is stuck in the mud. The price of the cryptocurrency took a dive last week, levelled off, and ended at $13,800. In the past month, prices have declined by about 30% through Friday, according to Coinbase.

Tightening regulation is, in part, responsible.

Leaked documents showed that China’s top internet-finance regulator asked local governments to encourage bitcoin mining operations—those using computers to verify and add to a public ledger for cryptocoin rewards—to make an “orderly exit.” Financial authorities in South Korea said they were checking up on six banks that offer cryptocurrency accounts to see if they were complying with anti-money-laundering rules, among other things, and they descended on two large crypto exchanges on suspicions of tax evasion. And the government said it was planning to ban trading on crypto exchanges, then walked back the statement later that day.

The Securities and Exchange Commission, for its part, hit the pause button on a dozen bitcoin exchange-traded funds and two mutual funds last week. First Trust, Direxion Asset Management, Rex ETFs, ProShares, Cboe, and VanEck pulled their filings last week per the SEC’s request.


THE FIRST TIME THE SEC asked firms to pull their filings, it was because they were too early; they were filing for vehicles to hold derivatives that didn’t yet exist. Now there are questions around liquidity and pricing.

Details are sparse. It’s unclear what level of average trading volume of futures contracts, and how much of a trading history, would make regulators more comfortable. Some sponsors argue that bitcoin futures ETFs would add to liquidity because they’d be buying up bitcoin futures. But the concern is that all that buying will distort futures pricing.

“We’re waiting for an official letter,” says Garrett Stevens, CEO of Exchange Traded Concepts, the trust for the Rex ETFs. “My impression is that the [SEC] isn’t totally shutting [bitcoin ETFs] down. They just need more time to understand before they can comment on the various products that have been filed.”

If only these communications were public, which they normally aren’t until resolutions on various issues are reached. The race for the first bitcoin futures ETF will reset when the SEC communicates to sponsors what it needs. Sponsors that can best interpret what the regulator wants and address the issues will win.

Interactions between the SEC and ETF sponsors have been awkward, in part because the way these ETFs came to market was awkward. For bitcoin futures ETFs, sponsors chose to file so-called posteffective amendments to registration statements, starting a 75-day countdown. In that time, the SEC can review disclosures, but once time is up sponsors can sell their securities. The fact that the SEC didn’t go nuclear and issue stop orders suggests that bitcoin futures ETFs may yet come to market.

SEC Chairman Jay Clayton has issued statements, but they resemble more general observations and questions than clarity on cryptocurrencies as investments. There needs to be a public discourse at least as rigorous as crypto die-hards’ enthusiasm. Perhaps then, the fever will break, bitcoin prices will grow less volatile, and bitcoin ETFs will finally come to the market. 

Email: crystal.kim@barrons.com

Follow @crystalkimmm





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