SEC Throws Cold Water on Bitcoin ETF Plans

sec

The US Securities and Exchange Commission (SEC) has thrown cold water on exchange-traded fund (ETF) providers jockeying to list the first bitcoin ETF.

Thought to be a game-changer for cryptocurrency adoption, bitcoin ETFs would provide investors with the ability to obtain exposure to the flagship cryptocurrency through a conventionally-wrapped investment product.

Fund providers have sought SEC approval for cryptocurrency-derived ETFs for years, but the SEC has been reluctant to lend its approval to these products, which would likely be popular among retail investors.

The rush to list a bitcoin ETF intensified following the launch of the first bitcoin futures contracts, as the general consensus among analysts was that the SEC would quickly approve a fund that invested exclusively in futures contracts, which currently trade on two regulated US exchanges.

However, several recent developments indicate that this may not be the case.

Most recently, the SEC sent two investment industry trade groups a lengthy letter outlining a number of “significant investor protection issues” that fund sponsors must answer before the agency will consider approving a bitcoin ETF.

“We believe…that there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors,” Dalia Blass, director of investment management at the SEC, wrote in the letter, which was dated Jan. 18.

Blass said that the SEC was chiefly concerned about the liquidity of the futures markets, as well as how to assign a fair market value to what would be intensely-volatile products. However, she also touched on a variety of other topics, including market manipulation, custodial issues, and arbitrage.

“[T]he innovative nature of cryptocurrencies and related products, as well as their expected use and utility in our financial markets, means that they are, in many ways, unlike the types of investments that registered funds currently hold in substantial amounts. In light of these considerations, we have, at this time, significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy” federal securities laws, Blass said.

Earlier this month, the SEC reportedly asked fund providers to voluntarily withdraw their bitcoin ETF applications, citing some of the concerns outlined in the letter above.

Notably, the agency also pressured the first blockchain-focused funds to remove the word “blockchain” from their names, although these ETFs — which primarily invest in companies experimenting with blockchain technology — were allowed to begin trading this week after complying with this request.

Featured Image from SEC/Flickr

US SEC freezes assets related to PlexCoin ICO “scam”

sec ico pr

Today, the US Securities and Exchange Commission issued a press release regarding the IPO of PlexCoin stating that it had obtained an emergency asset freeze with the intention of stopping the ICO (Initial Coin Offering, see below) ‘scam’ that had gained traction extremely quickly. PlexCoin, the currency in question had raised $15 million in a month from a large number of investors. The SEC filed a complaint in a New York federal court stating that Dominic Lacroix, their partner Sabrina Paradis-Royer, and PlexCorps had sold PlexCoin over the internet to a large number of investors, claiming that it would provide a 1354% profit in less than a month. All three have been charged with violating anti-fraud provisions, while Dominic Lacroix and PlexCorps have also been charged with violating the registration provision in US federal securities law. The SEC has stated it also wishes to file permanent injunctions and discouragement with interest against all three, and that it wishes to ban both Dominic and Sabrina from offering digital securities in the future, and Dominic from holding an officer or director position in a public company.

PlexCoin is the first ICO scam punished by SEC, but not the first ICO scam

These are the first charges filed by the SEC’s new cyber unit, and the chief of the unit, Robert Cohen stated: “This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing”. Other ICO scams in the past include Langpie.

What is an initial coin offering?

Initial Coin Offerings are cryptocurrencies where you can purchase some currency before the coin launches. It is typically used as a form of crowdfunding for cryptocurrencies to get off their feet, for example, ethereum used an ICO in 2014 before its launch in July 2015. ICOs are also used as a scam, as it does not require much other than a website and some false promises – So long as you can get exposure and you make the right promises, there is quite a bit of (illegal) profit to be made

CFTC says that ICO tokens are commodities – but could still be securities

Today, the LabCFTC, a fintech initiative within the Commodities Futures Trading Commission (CFTC), released a paper titled  “A CFTC Primer on Virtual Currencies.” The doc reveals the CFTC’s current stance on Initial CoinSale (ICO) tokens in relation with other agencies – though there is this disclaimer:

“This primer format is intended to be an educational tool regarding emerging FinTech innovations. It is not intended to describe the official policy orposition of the CFTC, or to limit the CFTC’s current or future positions oractions. The CFTC does not endorse the use or effectiveness of any of the financial products in this presentation.”

The CFTC is essentially saying that it has determined that virtual currencies and tokens are still commodities, but could also be securities – as the Securities Exchange Commission (SEC) has previously said this year. The CFTC’s newest thoughts on virtual currency add this SEC consideration without going back on previous designations. Back in 2015, the agency did declare that it would treat Bitcoin and other cryptographic assets as commodities. The CFTC clarified how their definition of cryptocurrency and tokens is consistent with the SEC’s:

“There is no inconsistency between the SEC’s analysis and the CFTC’s determination that virtual currencies are commodities and that virtual tokens may be commodities or derivatives contracts depending on the particular facts and circumstances.”

ICO tokens, like their underlying cryptocurrencies, are also commodities to the CFTC

Whether or not you agree with the designation of tokens or cryptocurrencies as a security and a commodity (and a property for tax purposes), the additional clarifications do somewhat clear the haze and allow bitcoin and blockchain based companies to charge forward.

Not all ICOs are dandy – and many ICOs are just straight up scams that do deserve multi-agency government crackdown. Take LangPie for example. The decision does give ICOs some additional validation and will undoubtedly be used to guide US-based ICOs, at least.

Full doc here.

What do you think about the CFTC’s suggestion that ICO tokens are both commodities and securities? Let us know in the comments below.