It’s the question on everyone’s lips right now: when are we getting a bitcoin ETF?
If, and when, a bitcoin ETF (exchange-traded fund) is approved, it would provide an easy way for institutional investors to get exposure to the crypto market, without having to buy or store bitcoin itself.
Many see the approval of a crypto ETF as a game-changer and the catalyst for a market recovery.
But if discussions at this week’s Consensus event are anything to go by, that bitcoin ETF approval date might keep moving further back.
Background reading: What is a Bitcoin ETF? (And WIll it Trigger a Price Surge?)
In a discussion with the chairman of the Securities and Exchange Commission (SEC) Jay Clayton, we got an insight into what the regulators need to see before approval is granted. Here are five stumbling blocks that need to be overcome.
1. Crypto Theft
One of Clayton’s biggest concerns is the threat of theft in the cryptocurrency market. Almost $1 billion worth of crypto has been stolen from exchanges this year alone and that number is weighing on the SEC’s decision.
“We’ve seen some thefts around digital assets that make you scratch your head,” Clayton explained.
Before we see the approval of a bitcoin ETF, we need an infrastructure of safe, reliable crypto storage.
2. Better Custody of Bitcoin
As Clayton went on to explain, “we care that the assets underlying [the] ETF have good custody, and that they’re not going to disappear.”
Custody and storage solutions are on the horizon. BitGo is one of the pioneers in digital asset custody services and many others are cropping up.
Fidelity will soon launch a cryptocurrency exchange and custody solution and Goldman Sachs is reportedly working to integrate a crypto custody service. Meanwhile, existing exchanges like Gemini have incorporated full insurance coverage in a bid to strengthen its custody security.
However, even with all the progress, Clayton maintained that these services “need to be improved and hardened.”
3. Market Manipulation
There’s still a dark cloud hanging over the crypto market in terms of price manipulation. It’s one of the key reasons cited by the SEC when rejecting previous ETF proposals.
In Clayton’s words, “what investors expect is that trading in the commodity that underlies that ETF makes sense and is free from the risk of manipulation. It’s an issue that needs to be addressed before I would be comfortable.”
He went on to say that he doesn’t trust crypto exchanges to halt market manipulation. Clayton has good reason to be cautious here. One research paper concluded that bitcoin’s 2017 bull run was driven by market manipulation at the Bitfinex exchange.
He did at least offer a hint into what mechanisms the SEC is looking for to counter manipulation:
4. Market Surveillance
Traditional stock exchanges are monitored by smart surveillance systems which spot signs of manipulation and wash trading.
“Those kinds of safeguards do not exist currently in all of the exchange venues where digital currencies trade.”
Again, there are improvements on the horizon. Nasdaq’s new bitcoin futures market, for example, will integrate some of those surveillance features into the crypto trading arena. Similarly, the Gemini exchange (owned by the Winklevoss Twins) struck a deal with Nasdaq to integrate its surveillance technology.
Better regulated exchanges are likely to be a key requirement before a bitcoin ETF is approved by the SEC.
5. Anti Money Laundering Protections
The final point of contention comes down to anti-money laundering. In order to counter money laundering in the crypto space, exchanges would need to implement the following:
- Identity and background checks
- Reporting of suspicious activity
- An internal task force to identify laundering
The global anti-money laundering task force is reportedly close to issuing a full set of guidelines regarding cryptocurrency, but the SEC needs to see wide implementation of these guidelines before approving an ETF.
Despite the excitement around the pending approval of a bitcoin ETF, we’re still a long way from satisfying some of the key concerns. Progress is being made, but it may be some time before that approval date comes.