What the SEC chair’s comments on crypto mean for a possible bitcoin ETF

The head of the SEC says that crypto assets need a lot more regulation before they can move forward.

Speaking at the Aspen Security Forum, SEC Chair Gary Gensler said, “This asset class is rife with fraud, scams, and abuse in certain applications.”

“We need additional Congressional authorities to prevent transactions, products, and platforms from falling between regulatory cracks,” Gensler said.

Gensler addressed several aspects of the crypto business in his speech.

Digital tokens:  Gensler said that many digital tokens, because they are investment contracts, are offered and sold as securities and should be regulated as such. ” I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight,” he said. 

 ”This leaves prices open to manipulation. This leaves investors vulnerable.”   He says he has urged staff to “continue to protect investors in the case of unregistered sales of securities.”

 Crypto trading platforms:  Noting that a typical trading platform has more than 50 tokens on it, Gensler said the platforms have “significant gaps in investor protection.”  The issue is whether any of those tokens are securities that would come under the purview of the SEC:  “To the extent that there are securities on these trading platforms, under our laws they have to register with the Commission unless they meet an exemption.”

Stablecoins: Gensler noted that trading crypto-to-crypto was typically done using stablecoins, which are crypto tokens pegged or linked to the value of fiat currencies.  Gensler is concerned these stablecoins may be used as part of a broader effort to sidestep anti-money laundering and tax compliance laws, and also affect national security.  Gensler said these stablecoins may also be securities and investment companies and if so should come under the purview of the SEC as well.

Bitcoin ETFs.  Several companies have sought the SEC’s approval for a bitcoin ETF.  All have been denied so far.  However, Gensler noted that there are a number of vehicles that already invest in bitcoin, such as the closed-end Grayscale Bitcoin Trust, and mutual funds that invest in bitcoin futures.  These investments exist under the 1940 Investment Company Act, which, Gensler said, “Provides significant investor protections.”

“Given these important protections, I look forward to the staff’s review of such filings, particularly if those are limited to these CME-traded bitcoin futures.”

Last week, ProShares went live with a mutual fund tracking bitcoin futures, the Bitcoin Strategy ProFund (BTCFX).

Gensler did not comment on the raft of bitcoin ETF applications that do not own bitcoin futures, but instead seek to own bitcoin directly.

Gensler may be attempting to distinguish between ownership of bitcoin in the futures market, which is heavily regulated, and a bitcoin ETF which would involve the fund buying bitcoins through unregulated parties.

Custody of crypto assets.  Gensler said the SEC was seeking comment on crypto custody arrangements by broker-dealers and relating to investment advisers. “Custody protections are key to preventing theft of investor assets, and we will be looking to maximize regulatory protections in this area,” he said.

Gensler: More innovation will also require more regulation

Gensler has been perceived as a champion for financial innovation, and with good reason.  Gensler said that crypto “has been and could continue to be a catalyst for change in the fields of finance and money.” 

However he has made it clear that the crypto space is in dire need of additional regulation before it can move ahead:  “For those who want to encourage innovations in crypto, I’d like to note that financial innovations throughout history don’t long thrive outside of our public policy frameworks…If this field is going to continue, or reach any of its potential to be a catalyst for change, we better bring it into public policy frameworks.”