The SEC’s Shiny New Letter
On January 18, the U.S. Securities and Exchange Commission (SEC) decided to rain on the cryptocurrency parade by issuing a staff letter directed toward two Wall Street trade groups. The concern? Many fancy new Exchange-Traded Funds (ETFs) and mutual funds based on Bitcoin (BTC) are a no-go—for now.
Why Is the SEC Concerned?
Dalia Blass, the SEC’s director of investment management, outlined the agency’s apprehensions regarding these potential investment products. She acknowledged the benefits that cryptocurrency proponents highlight but also pointed out that the critics aren’t just whistling in the wind. They’ve raised concerns over transparency, trading, and the inherent volatility of cryptocurrency assets. Essentially, the SEC is saying, “Show me the data!”
The 1940 Act: A Heavyweight Rule
The regulators are not fiddling around; they’re looking at the Investment Company Act of 1940, which governs all manner of investment entities. If companies want to play with crypto, they need to show they align with this regulation. Blass noted, “We have significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies would satisfy these requirements.” These questions have turned crypto ambitions into legal limbo.
Valuation Woes: More Complicated Than It Sounds
One of the headaches the SEC brings up is valuation. How on earth do you determine the daily value of a portfolio filled with digital currencies that can swing by double digits within hours? Blass tossed a hypothetical into the ring: “What if a cryptocurrency forks into different paths?” Talk about splitting hairs—or coins. The SEC wonders how these funds would navigate the bewildering world of different cryptocurrencies, each with their own lively price tags.
Liquidity: Can Investors Cash Out?
Another concern is liquidity. The 1940 Act mandates that funds must provide an easy exit for their investors. But with cryptocurrencies, liquidity can feel like chasing a mirage in the desert. As the SEC expressed, if investors can’t easily liquidate their holdings at the end of each trading day, that’s a major problem.
The Ominous Shadow of Fraud
The specter of fraud and market manipulation has long haunted the crypto world. The SEC reiterated concerns that were raised in an August 2017 bulletin regarding Initial Coin Offerings (ICOs). The bottom line? The regulators are worried that without adequate safeguards, the cryptocurrency market could easily be a playground for fraudsters.
What Does This Mean for Cryptocurrency Funds?
In light of these concerns, the SEC has taken a firm stand: until their queries are satisfactorily answered, the gates to cryptocurrency-based funds are effectively locked. Blass concluded emphatically, “We do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency.” Until further notice, potential fund sponsors may be left twiddling their thumbs.
