The quest to establish exchange-traded funds for cryptocurrencies has been a long and dramatic one, filled with colorful characters and unexpected plot twists—the most recent of which occurred just last week at the SEC.
The characters in this tale include Cameron and Tyler Winkelvoss (of Social Network fame), who for years have been attempting to launch a bitcoin ETF (exchange-traded fund). Their motivation is easy enough to understand. For the Winkelvoss twins (who are heavily invested in bitcoin) and other alt-coin holders, crypto-focused ETFs represent a promising vehicle to becoming richer than they already are. ETFs in cryptocurrencies would draw an influx of investment from pension funds, hedge funds, and other institutional investors that have until now watched the crypto craze from the sidelines. It would also make it easier for investors of all kinds to gain exposure to alt-coins in tax-advantaged accounts. All other things being equal, these two factors would increase the demand for the cryptocurrencies around which ETFs are structured.
All good drama has conflict, and the Winkelvi’s campaign ran into a serious obstacle last March, when the SEC denied an application that would have cleared the way for their pet project. In the 10 months since, however, the stars have been aligning for a reconsideration of the SEC’s decision. Two developments, in particular, made a reversal seem possible.
First, in the course of denying the Winkelvi’s application, the SEC emphasized the unregulated nature of bitcoin; it indicated that its answer could change if a regulated futures market for bitcoin existed. Since then, of course, the CFTC has greenlit the bitcoin futures market. Second, in August 2017, the SEC installed Dalia Blass as its director of its Division of Investment Management. Importantly, that division approves ETFs, and Blass’s former law firm, Ropes & Gray, represents the Winkelvoss twins in their ETF initiative.
It has all the makings of a comeback story, but anyone expecting Blass to blindly do the bidding of her former firm’s clients will be thrown by the latest plot twist. In a letter sent to trade group leaders last week, Blass voiced strong reservations about cryptocurrency ETFs. She cited “significant outstanding questions” about how prospective cryptocurrency funds “would satisfy the requirements of the 1940 Act.” The letter spells out compliance concerns in a range of areas, including valuation, liquidity, and custody. In the end, Blass notes that she has asked sponsors hoping to register cryptocurrency funds to withdrawal their registration statements.
With the letter, Blass poured cold water over those suffering from crypto fever. For all the disruptive qualities of cryptocurrencies, Blass’s office has signaled that the SEC will be treating investment products involving them like any other that the agency regulates. By asking in the letter, for instance: “How would [a fund] satisfy the custody requirement of the 1940 Act and relevant rules?” she indicates that the SEC is not interested in bending the framework of the 1940 Act to meet cryptocurrencies. While Blass’s letter concerns itself mostly with the 1940 Act (applicable to funds), it indicates in conclusion that the 1933 Act will apply with equal force to cryptocurrency-related investments, wherever applicable.
In the wild story of cryptocurrency over the last year, the idea of treating them like ordinary investments may be the craziest development yet.