In an order putting off approval, the SEC called for public comment on a number of concerns, including whether the bitcoin market is subject to manipulation. The agency similarly asked for public comment in June.
“There’s nothing [in the SEC’s order] that we’re not saying ourselves as an ETF issuer,” Ryan Louvar, general counsel at WisdomTree, told Insider previously. “Bitcoin is volatile. It’s a speculative asset.”
But the SEC now may be warming up to the view, expressed by many bitcoin fund applicants, that not approving a regulated ETF could present its own risks. In Tuesday’s filings – as in previous ones – the agency asked for comment on whether “manipulation concerns … are outweighed by quantifiable investor protection issues.”
“I was encouraged by that step, that the SEC is at least taking incremental steps here,” said Louvar.
SEC Chair Gary Gensler has worried aloud that the bitcoin market, as currently structured, offers no real investor protections or any way to prevent manipulation. That has made some in the crypto industry bearish on the prospects for ETF approval this year.
In a Wednesday letter addressed to SEC Chairman Gary Gensler, Sen. Elizabeth Warren demanded the agency answer a series of questions related to cryptocurrency regulation – and said she expects an answer no later than July 28.
The Massachusetts Democrat – who serves as chair of the Senate Banking Committee’s Subcommittee on Economic Policy – laid out her goal of protecting investors in the expanding market for digital currencies.
“The increased use of cryptocurrency exchanges presents unique risks to consumers,” Warren said in the letter. “Although they describe themselves as cryptocurrency ‘exchanges,’ these platforms lack the same types of basic regulatory protections as traditional national securities exchanges like the New York Stock Exchange or Nasdaq.”
Warren said the information she’s requested will help Congress determine if it needs to act to ensure the SEC has the needed authority to close existing gaps in regulation. Those gaps, she said, leave investors and consumers vulnerable to dangers in what she called a highly opaque and volatile market.
Warren also said in her letter that nearly 7,000 people in the US reported losses of $80 million from cryptocurrency scams between October 2020 and March 2021.
“The harms to consumers as a result of this under-regulated market are real and continue to proliferate in the absence of effective SEC regulations,” she said.
Warren presented five questions to the SEC, beginning with:
“Do you believe that cryptocurrency exchanges are currently operating in a ‘fair, orderly, and efficient’ manner? If not, what problems has the SEC identified that are associated with the use of these exchanges?”
The cryptocurrency market this year has notched a number of milestones including exceeding a valuation of $2 trillion in April as bitcoin topped a $1 trillion market value . Those moves were made alongside the trading debut of Coinbase, the largest crypto exchange in the US. Wall Street banks and other institutions have ramped up their business exposure to the market. Meanwhile, the SEC is considering the application of 13 bitcoin ETFs.
But the cryptocurrency market’s valuation has since fallen to roughly $1.4 trillion because of a sell-off in bitcoin, ether, and other digital currencies.
If you invest in crypto, “ask questions and demand clear answers.” That advice, from former SEC Chair Jay Clayton, is now being put to practice as his successor, Gary Gensler, grills the industry over pending approval of a bitcoin ETF.
Yet as the seven-year quest to get the regulatory go-ahead drags on, some fund managers and crypto executives who spoke with Insider question whether Gensler’s SEC has taken too hawkish an approach.
These bitcoin ETF proponents say common concerns about crypto, like volatility and potential market manipulation, could be said of other asset classes, too. They note that Canada, Europe, and Brazil all have functioning bitcoin funds in circulation. And they argue that repeatedly putting off approval carries its own set of risks.
Anxieties that the bitcoin market may be rife with fraud and manipulation are “a bit of a red herring,” said Will Rhind, CEO of GraniteShares, which filed for a bitcoin futures ETF in 2017.
“There are many markets that are open to manipulation, but that doesn’t stop them from existing or people from launching products in them,” he said, pointing to existing ETFs for penny stocks and oil, long swayed by petrostate cartel OPEC.
Ryan Louvar, general counsel at WisdomTree, which manages several European bitcoin ETFs and has applied for one in America, shares the sentiment. The regulatory standard applied to bitcoin funds has been “very, very high – maybe even novel,” he said.
In WisdomTree’s view – one echoed across much of the industry – the SEC’s slow roll on greenlighting a bitcoin ETF is far from risk-free. As the agency delays, demand for bitcoin and other crypto products is not letting up. The result is that the crypto-curious are left with more dubious avenues for investing their money. On balance, such risks to retail investors ought to outweigh the SEC’s manipulation concerns, Louvar said.
It is a view that the SEC is, at a minimum, curious about. In a call for industry comment last month, the commission asked precisely this question: how should the investor protections brought by regulated bitcoin ETFs weigh against fears of manipulation?
Across the Atlantic, that question has been asked and answered, said Jason Guthrie, WisdomTree’s Europe head. Under the EU’s “passporting” regime – which lets financial-services firms seek regulatory approval in 30 European nations simultaneously – crypto ETFs have multiplied across the continent. Sweden was the first domino to fall, starting in 2015, prompting EU-wide approval. The last major holdout is the UK, tied down by messy Brexit negotiations.
But while Europe’s ETF experience may make the SEC look like a laggard, the broader reality is more subtle, said Guthrie. American regulators have moved proactively to regulate crypto-custodial companies such as Coinbase Custody and Fidelity Digital Assets. For evidence, look no further than the fact that many European-listed crypto ETFs, like those of WisdomTree and ETC Group, use custodians based in America.
Regulators across the world are “looking at different things and at different paces,” said Guthrie.
Nor do all fund managers fault the SEC for taking its time. Some think approving a bitcoin ETF opens the floodgates to all manner of newfangled crypto products.
“It’s not just about bitcoin,” noted Greg King, CEO of Osprey Funds, which runs an off-exchange bitcoin fund. SEC staffers “have to be thinking in the back of their head – how is this going to set a precedent for anything else?”
Leah Wald, CEO of Valkyrie, another bitcoin ETF hopeful, added the SEC is being “deliberate” in combing through an industry that has rapidly matured. She said she wished the process was faster but that the concerns were fundamentally “valid.”
SEC approval may ultimately rest on the industry developing surveillance methods that give regulators a handle on when and where markets are being manipulated, said Chen Arad, COO of Solidus Labs, a monitoring firm that works with regulators.
“Once you open the door, it’s harder to go back. The best thing the industry can do is work on providing assurances through data-sharing agreements and shared surveillance,” he said.
Despite the hesitancy from the SEC, investors have indicated that they’re interested in a crypto-ETF.
A recent Credit Suisse survey found that 33% of financial advisors would prefer to invest in digital asset or cryptocurrency ETFs prior to making direct investments into the asset class. 40% of advisors would prefer crypto exposure via an ETF over directly investing entirely.
Canada has already approved and launched several bitcoin and ether ETFs, but the US is still waiting for SEC approval. Currently the SEC is reviewing at least eight applications for what could be the first cryptocurrency ETF in the country.
The US markets regulator has released its agenda for the year – and bitcoin isn’t on there.
Regulators at the Securities and Exchange Commission will be focused on short-selling, special purpose acquisition companies or SPACs, and the “gamification” of retail investing, among other topics.
But the SEC is not planning any new rules on cryptocurrencies, according to its agenda, released Friday, despite signs that it is keeping a close eye on bitcoin and other digital tokens.
SEC boss Gary Gensler has said that investors in cryptocurrencies need more protection, given that the crypto world is currently largely unregulated.
Yet he has also said that cryptocurrencies fall into something of a grey regulatory area. One issue is that the SEC makes rules for securities, but does not consider bitcoin to be one.
The SEC chairman in May pushed Congress to kick off the process of creating regulations for cryptocurrencies and crypto exchanges.
“There’s a lot of authority that the SEC currently has in the securities space, and there are a number of cryptocurrencies that fall within that jurisdiction,” Gensler told lawmakers.
“But there are some areas, particularly bitcoin-trading on large exchanges, that the public is not currently really protected.”
However, the SEC has been keeping close tabs on bitcoin and cryptocurrencies. It has warned of the dangers of investing in funds that focus on bitcoin futures, for example, and Gensler has spoken publicly about crypto assets several times.
And there are signs that lawmakers themselves are beginning to take digital currencies more seriously. Senator Elizabeth Warren last week called for a crackdown on “environmentally wasteful cryptocurrencies” like bitcoin in order to help fight the climate crisis.
Even though bitcoin doesn’t feature on the SEC’s rulemaking agenda, the markets regulator’s planned focus on “gamification” could touch upon cryptocurrencies, which retail investors trade on platforms such as Robinhood.
The Securities and Exchange Commission is looking at changing rules around share trading after the day-trader frenzy around meme stocks showed equity markets may not be as efficient as they could.
Chairman Gary Gensler said Wednesday he has asked the regulator’s staff to submit recommendations on a range of market rules, including the high fees paid to Wall Street brokers for executing small-investor orders and the rise of commission-free brokerage apps.
Their recommendations will address the issue of payment for order flow, or the compensation online brokers receive when stock orders are routed to third-party firms like Virtu Financial and Citadel Securities in order to carry out the trade.
Shares in Virtu fell 7.7% after Gensler’s comments. The high-speed trader handles about one-third of individual investors’ order flow in US stocks, according to the Wall Street Journal. Virtu’s stock rallied this year alongside the meme-stock frenzy, while Citadel Securities isn’t publicly traded.
Gensler previously called out popular investing apps like Robinhood that have introduced millions of amateur investors to stocks through the lure of zero commissions. He criticized the company for encouraging the gamification of the stock market, and for not doing enough to educate its user base of the risks associated with investing.
Robinhood’s business model, which operates on a system of payment for order flow, allows it to offer so-called “commission-free trading.” But some lawmakers have called for increased examination into the potential conflict of interest it presents its users.
The SEC will look into this practice, that uses phone alerts and other notifications to get investors to trade more, Gensler said at a Piper Sandler conference in New York.
“The question is whether our equity markets are as efficient as they could be, in light of the technological changes and recent developments,” he said.
Most of these issues came to regulatory attention after day traders used social platforms like Reddit to bid up prices of heavily-shorted stocks like GameStop, fuelling an over 1,200% surge in the video-game retailer’s stock in January.
New SEC rules could impact the business models that online brokerages use, meaning Robinhood and its competitors would have to operate under new guidelines.
“Brokers profit when investors trade,” Gensler said. “For those brokers who have these arrangements – and not all do – higher trading volume generates more payment-for-order flow. What makes the current zero-commission brokerage environment different is that investors do not see their costs as they’re executing trades, so they may perceive them as free.”
Investors and fund managers are longing for the Securities and Exchange Commission’s approval of a bitcoin ETF, but recent comments from Chairman Gary Gensler suggest they best not hold their breath.
Bitcoin ETF applications have been under review by the SEC for months, but regulatory scrutiny remains as the applications await a final decision.
Gensler told Congress last week that “there are many challenges and gaps for investor protection in [crypto] markets,” adding that “none of the exchanges trading crypto tokens has registered yet as an exchange with the SEC.”
His comments suggest that the SEC wants to have more regulatory oversight of cryptocurrencies before it approves a slew of bitcoin etf applications. Current bitcoin ETF applicants awaiting approval from the SEC include Fidelity, WisdomTree, and VanEck, among others.
VanEck’s bitcoin ETF filing was supposed to receive a decision from the SEC on April 28, but hours before the deadline, the agency delayed the decision to June at the earliest.
“I expect that [delay] to happen with all of our filings, to be honest,” Laura Morrison, global head of listings at CBOE, told the Financial Times. Many of the bitcoin ETF applications have picked the CBOE as the exchange to list on.
Enthusiasm for Gensler among the crypto community was strong amid his initial appointment, as he previously taught classes on crypto and blockchain technology at MIT. But Gensler’s depth of knowledge in the crypto-space means he also knows of its potential pitfalls and is concerned about opening the floodgates for investors without proper guard-rails in place.
“[Gensler] wants to see regulation there, and if that happens, it seems like that would be what the SEC needs in order to approve a bitcoin ETF,” Craig Salm, vice-president of legal at Grayscale told the Financial Times. Grayscale operates the Grayscale Bitcoin Trust, which differs from an ETF and trades on the OTC markets.
But some remain optimistic on the chances of approval for a bitcoin ETF, including the CEO of VanEck, Jan van Eck.
“We have a ‘glass half-full’ view of the status of cryptocurrency regulations. Those who oppose a bitcoin ETF are effectively forcing investors into inferior fund structures and less regulated venues,” van Eck told the Financial Times.
Whether the upcoming bitcoin ETF applications are further delayed or approved, will likely be known within a few weeks. Until then, investors who want exposure to bitcoin will have to either buy it directly on a crypto-exchange platform like Coinbase, or settle for the bitcoin trust funds managed by Grayscale and Osprey.
Note: A previous version of this story was corrected to remove an incorrectly paraphrased statement from the CBOE’s Laura Morrison.
The Securities and Exchange Commission will tackle bad actors in crypto and has to be prepared to make cases against them to protect investors, chairman Gary Gensler said at the annual FINRA conference on Thursday.
“The SEC and FINRA should be ready to bring cases involving issues such as crypto, cyber, and fintech.”, Gensler said in his remarks at the conference, indicating that the SEC would crack down on misconduct in the crypto industry.
At the end of 2020, the SEC sued Ripple, a global payments firm that works with blockchain technology, and two of its executives. The SEC said they had raised $1.3 billion by selling the cryptocurrency XRP as an unregistered securities offering. The case is still ongoing and the company’s management has repeatedly denied any wrongdoing.
“We need to do whatever we can to ensure that bad actors aren’t playing with working families’ savings and that the rules are enforced aggressively and consistently,” Gensler said.
He reiterated the SEC would go after misconduct in all areas of the financial system. This could include “deceptive conduct by private funds, offering or accounting frauds, insider trading, market manipulation, failures to act in retail customers’ best interests, reporting violations, best execution and fiduciary violations”, according to the SEC chairman.
Alongside equities markets, climate change, market transparency and human capital, crypto and the gamification of investing – which is often associated with the rise in retail and crypto investing during the pandemic – were areas that Gensler would seek to address, he said.
Regulations and their enforcement are key in achieving the SEC’s mission of encouraging the creation of capital, ensuring investors’ safety and maintaining “fair, orderly, and efficient markets,” Gensler said. “We need rules of the road and a cop on the beat,” he continued.
Rules are there for a reason and bending them was not in the interest of consumers and could cause more harm than good, Gensler told the audience.
The SEC is considering regulatory approaches towards crypto, amongst them the safe-harbor policy proposed by crypto-friendly SEC commissioner Hester Peirce, nicknamed ‘crypto-mom’. Her policy would give crypto asset and fund issuers a three-year grace period in which crypto tokens would not be classified as securities.
In March, Peirce said she hoped crypto regulation would progress in 2021, as regulatory bodies were too focused on the illicit activities linked to crypto technology, rather than the benefits and she hoped to collaborate with then newly installed chairman Gensler on this.
Billionaire hedge fund boss Ray Dalio has said the biggest risk to cryptocurrencies is their own success, which could cause governments to crack down on them to ensure they control the money supply.
Talking about cryptocurrencies, Dalio told the Wall Street Journal “Future of Everything Festival” on Tuesday: “Its own biggest risk is its success, because as a storehold of wealth no government wants to have an alternative currency.”
The comments from Dalio, the founder and co-chief investment officer of investment titan Bridgewater Associates, came soon after regulators and watchdogs in both the UK and US hinted at official skepticism of crypto assets.
Bank of England governor Andrew Bailey said last week people should only invest in crypto “if you’re prepared to lose all your money.”
And Gary Gensler, the new head of the US Securities and Exchange Commission, said in a Congressional hearing the crypto world “could benefit from greater investor protection.”
Dalio said the future of cryptocurrencies is “exciting and unknown.” He added: “Crypto as a digital clearing mechanism and so on, very exciting, very bullish. Crypto as a storehold of wealth, very interesting. Probably will be important for us.”
But he said he remained concerned that governments could get tough on crypto if they feel their monetary sovereignty is threatened, something that he has talked about in the past.
Regulators around the world are increasingly focused on cryptocurrencies after bitcoin’s meteoric rise, with Turkey banning the use of crypto assets for payments and India flirting with an outright ban.
US regulators have not so far announced any plans to tighten crypto regulations, although some analysts have said that Gensler’s stance makes the approval of a bitcoin exchange-traded fund unlikely any time soon.
New rules may be needed to tackle the “gamification” of trading on popular apps, which can prompt users to make bad investing decisions, according to the new head of the Securities and Exchange Commission.
Gary Gensler said in written testimony to Congress on Wednesday that many of the US’s regulations on trading were created before fast and commission-free apps started to dominate the retail investing landscape.
In particular, Gensler expressed concern about the “gamification” of retail trading. Apps are increasingly using features like points, rewards, leaderboards, bonuses and competitions to boost user engagement, he said.
Gensler is set to appear before the House Committee on Financial Services on Thursday, as part of its investigation into January’s GameStop saga, which saw retail traders unite to pump up the video game store’s stock.
Some lawmakers have become concerned about the influence of Robinhood, the commission-free trading app that has boomed in popularity and was at the centre of January’s volatility.
The new boss of the SEC – the powerful regulator that oversees US financial markets – said the gamification of trading could be costly to users.
“If we watch a movie that a streaming app recommends and don’t like it, we might lose a couple of hours of our evening,” he said.
“Following the wrong prompt on a trading app, however, could have a substantial effect on a saver’s financial position. A big loss could have immediate implications for the app user’s ability to afford their rent or pay other important bills. A small loss now could compound into a significant loss at retirement.
“Many of these features encourage investors to trade more. Some academic studies suggest more active trading or even day trading results in lower returns for the average trader.”
Gensler said these issues may require new rules. “Many of our regulations were largely written before these recent technologies and communication practices became prevalent. I think we need to evaluate our rules, and we may find that we need to freshen up our rule set.”
The House will begin the third of its hearings into the GameStop saga on Thursday. It is particularly focused on the impact of modern trading apps and the power they can have, after many of them suspended trading and shut out users during January’s market volatility.
Apps like Robinhood argue their popular and easy-to-use platforms have broken down barriers to investing.
Speaking before the House during an earlier part of the hearing in February, Robinhood CEO Vlad Tenev said: “The mobile app provides the intuitive experience customers want, while also providing them with tools and information to learn about investing and keep tabs on their finances.”