SEC Official Tells Bitcoin ETF Applicants to Focus on Market Surveillance, Custody, & Liquidity

Despite the bearish market conditions, crypto assets’ regulatory status is still a hot-button topic, as governments worldwide try to understand how to best approach this emerging sector. 

The US Securities and Exchange Commission (SEC) is arguably leading the charge for fair regulation, doing its best to safeguard investors from unwarranted financial risk, while treating the industry with respect.

SEC Commissioner attorney Kara Stein previously discussed the regulatory climate surrounding digital currencies with Bloomberg. Tackling the age-old debate of whether Bitcoin should be classified as a legitimate currency, non-correlated asset, security, or commodity, the Bloomberg host asked Stein what the SEC classifies the crypto asset as.

“Well, we [at the SEC] determine whether it is a security or not and leave whether it’s a currency or not to others… But I think it depends on the form of the product that is being presented because Bitcoin can be, as you already know, backed by blockchain technologies. So I see many folks in the market thinking through how they can use blockchain to make what they do better,” the regulator answered.

Stein seems to be saying that although Bitcoin has been classified as a non-security on most occasions, other vehicles involving crypto have been labeled as securities. The SEC, coupled with enforcement efforts from FBI and the CFTC, has led to the shut down of 1Broker, which was reportedly providing “security-based swaps funded with Bitcoins.”

While it indicates that the crypto is a security, 1Broker’s temporary demise tells startups that utilizing Bitcoin for investment products is by no means a get-out-of-jail-free card.

Although the Commissioner did not mention Ethereum or its regulatory status, it can be assumed that her statement regarding how Bitcoin’s status vary from product-to-product and case-to-case can be applied logically to Ether.

The Bloomberg host also asked the question that has been on the minds of crypto enthusiasts—is a Bitcoin—or cryptocurrency-backed exchange-traded fund (ETF) in the cards?

Stein responded with caution, saying that she does not know the answer since it depends on an ETF application’s “facts and circumstances.” Her vague answer prompted the Bloomberg anchor to ask what are the SEC’s concerns with a Bitcoin-centric ETF.

“At the end of the day, whatever fund presents a concept to us will have to show how they can get accurate valuations, how they make sure that there is physical custody, and how to make sure that there is adequate liquidity, especially in a 40 act fund context, where investors can get the money when they need their money. So we will look at all of those factors and make a decision based on that particular fund and how it will be able to handle those particular requirements,” the attorney noted.

The comments of the Commissioner reflects the qualms brought up in the SEC’s rejection of several cryptocurrency-backed ETFs. However, such regulatory issues are getting resolved quickly. Regarding custody, Fidelity’s newly launched subsidiary Fidelity Digital Asset Services will provide a valued cold storage custody solution that might satisfy the standards of the SEC.

Regarding liquidity, many have claimed that the introduction of Bakkt’s physically-backed BTC futures in December will facilitate a liquidity surge, likely satisfying the SEC’s desire for “markets of sufficient size.”

Although crypto innovators have yet to meaningfully address the regulator’s concern about accurate valuations, the moves are seemingly being made to achieve the SEC’s agenda, which may catalyze the agency to permit a crypto-backed ETF.