If there has been one governmental agency in the United States that seems to have done everything to stall the crypto train in its tracks, it is the Securities and Exchange Commission (SEC). It has refused to accept the Bitcoin market as anything but illegitimate, denying public access to a BTC Exchange-Traded Fund (ETF). Observers, however, have sensed a modest shift from it being a “bouncer” in 2018 to a “referee” of Initial Coin Offerings (ICOs) in 2019. Its actions sent a chill through the market, forcing an intellectual brain drain to other more receptive markets. Is the SEC friend or foe?
The SEC has not been entirely belligerent towards all things crypto. They have had to modify their positioning because a wave of institutional interest demanded so. Fabian Wahle, Chief of Compliance at NASH, told AMBCrypto that regulators had no choice, since big market players wanted in and they wanted oversight from the SEC: “Crypto regulations will have a huge effect on the future of the space, so it is positive that the SEC is beginning to take crypto more seriously and grappling with the implications of decentralization.”
Fidelity Investments was the first institutional player of note that broke ranks, announcing the formation of Fidelity Digital Assets, which would provide regulated access to the Bitcoin market for sophisticated clients, along with its top-of-the-line custodial services. Goldman Sachs was also rumored to be setting up a crypto trading desk, but they backed away. TD Amertitrade and E*Trade did not back away, nor did the owner of the NYSE, which proceeded with its Bakkt crypto futures exchange. As far back as August of 2018, Bakkt management espoused its intentions “to leverage Microsoft cloud solutions to create an open and regulated, global ecosystem for digital assets.”
To its credit, the SEC has supported the development of derivatives, futures, and options, along with custom-crypto products, which provide the “tools” that accredited investors demand. Charles Edwards, head of Capriole Investments, told AMBcrypto that these actions were necessary to begin the “onboarding process of institutional money.” The entry of institutional investors and derivatives can only help reduce the volatility of the Bitcoin market, one of the SEC’s primary concerns.
Edwards’ take is that: “We can speculate that the heavier involvement of institutions, and Bitcoin Options, will dampen Bitcoin’s volatility in the longer-term, and hence permanently change the trading dynamic altogether.” The SEC has also been supportive of smaller funds, again dedicated to institutional investors only, but the moves are evidence that the SEC is committed to the idea, while at the same time building its on oversight infrastructure to monitor the market.
What about a public access BTC ETF? Edwards thinks it is only a matter of time: “An ETF is probably inevitable, and the more time that passes, the more liquid and established Bitcoin will become (assuming no major government counter-movements or Bitcoin security breaches). Derivatives, Options and smaller funds entering the space will help this process, as does the growing stability of exchanges and other infrastructure in the space.“
Bitcoin advocates are more sanguine. In their own minds, they have given up on the concept happening in 2020 or soon thereafter. Jay Clayton, the chair of the SEC, has turned down no less than a dozen applications, citing several shortcomings in the market. Many of these issues had been addressed, and hopes were high in 2019 that one of three possible applications would receive approval. Such was not to happen. According to the SEC, the potential for price manipulation still existed.
Clayton has spoken publicly that much has been done in the Bitcoin market arena, but that more work still remained. In an interview in early December, he was still citing his need to protect investors from “manipulative acts”. Bitwise Asset Management, one of this year’s ETF application submitters, went so far as to produce a 227-page report that showed in detail how the BTC market has evolved, that 30% of the volume is concentrated in U.S. exchanges, and that the notion that 95% of volume was fake or of no economic value had been addressed by using “real-10 exchange volume”.
Their report noted that this “real-10 exchange volume” was a metric that even institutional funds used to determine settlement values. It read: “The report stated that the 10 exchanges used to derive Bitcoin’s price for their ETF, the real-10, traded “Extremely Tightly.” Institutional understanding was also on the same level, as every regulated crypto-product in the US or Europe [CBOE, CME, XBT Provider, and AMUN] drew their prices from the real 10-exchanges.”
Bitwise also proposed a weighted method for calculating regular price points, which would have nearly eliminate the possibility of manipulation, but Clayton and his staff were not convinced. Industry observers have since concluded that there is no chance for a BTC ETF, as long as Clayton is at the helm. He has already made up his mind and does not want to be the figurehead known for giving his approval.
In summary, the staff at AMBcrypto viewed 2019 from a positive perspective: “The three fronts of institutional interest – ETFs, derivatives, and custom crypto-products have seen significant development. ETFs came and went, with regulators stating that the market was still highly manipulated and immature, derivatives saw a new layer of speculation in options trading, while Bitcoin funds broke through and several companies like Fidelity and TD Ameritrade signaling their intention of launching crypto-products in the space.”
It appears that the SEC is not resistant on all fronts, which bodes well for 2020 and beyond. Edwards concluded: “If one were to look at the bigger picture, the SEC was level headed in confronting issues that needed confrontation while approving products with a strong-backer or the necessary prerequisites. Generally speaking, I think the SEC has been relatively neutral to Bitcoin. It could be a lot worse.“