SEC’s Moves To ‘Modernize’ ETFs Hint At Crypto Future

The U.S. Securities and Exchange Commission (SEC) is seeking to “modernize” the regulation of exchange-traded funds (ETFs) in a bid to make those investment vehicles more innovative, and give them quicker entrance to the market. Might that pave the way for the emergence of cryptocurrency ETFs?

This SEC move comes as crypto ETF launches — particularly those focused on bitcoin, arguably the marquee name in digital coins — have had a bumpy road.

SEC Chairman Jay Clayton told CNBC last month that “progress is being made” in crypto ETFs coming to market. However, last month, Van Eck Associates abandoned plans for a bitcoin ETF. Bloomberg said at the time that more than 20 crypto-related products had been waiting for approval from the SEC, but none gained that approval.

In the latest ETF regulatory changes, the drive to modernize the ETF regulation has also simplified what is known as “exemptive relief,” which made the process longer and more onerous for issuers.

Morgan, Lewis & Bockius Partner Laura Flores told PYMNTS via written exchange that the new ETF regulation — though not explicitly addressing previously articulated concerns about crypto-focused ETFs — should free up SEC resources and staff to focus on what she termed “novel products, such as cryptocurrency ETFs.”

“We think the SEC staff understands that the desire for broader access to cryptocurrency and cryptocurrency-based products is not a fad,” she told PYMNTS.

However, against that backdrop, the overarching concerns of the SEC toward crypto ETFs (and cryptos) remain. Chief among them, Flores said, is the protection of investors, particularly retail investors — “the moms and pops of Wall Street.” The SEC’s other key concerns revolve around price manipulation and price volatility.

Crypto prices, of course, have been nothing if not volatile. At this writing, one bitcoin is equivalent to $8,222, down significantly from the nearly $10,400 seen a month ago. As previously noted in this space, the pricing data itself (in addition to trading spreads) can vary widely across exchanges. In one nod to pricing volatility, one would-be fund offered by Bitwise would use prices for bitcoin taken from 10 exchanges, reported Bloomberg.

When asked by PYMNTS what it would take to bring crypto ETFs to retail investors (beyond the current landscape, where they are marketed to accredited investors), Flores said that “a retail-oriented cryptocurrency ETF will need to demonstrate that it can insulate itself and its investors from the more harmful characteristics of cryptocurrency — such as fraud, manipulation and extreme price volatility — as they pertain to the reference cryptocurrency.” At the same time, the ETF must provide exposure to that same reference crypto, while operating within the confines of the Investment Company Act, if the offering is structured as a 1940 Act ETF.

In reference to that Act, as PYMNTS noted, the SEC wrote, “As investment companies, ETFs are subject to the regulatory requirements of the federal securities laws.” Flores stated that efforts to comply with those laws generally mean that cooperation must exist among the ETF’s sponsor, service providers (including custodians) and exchanges.

When it comes to broader access to cryptocurrencies and crypto-based products, she said, the SEC “needs to be convinced, and the burden of proof is on the industry.”