On June 28, the Securities and Exchange Commission (SEC) voted to propose a new regulatory framework that would allow exchange-traded funds (ETF) to come to market without requiring applicants to apply for individual exemptive orders. The proposal is intended to speed up the application process, which can take months, increase competition and innovation in the ETF marketplace, and hopefully give investors more choices on how to invest their money.
According to a public statement made by SEC Chairman, Jay Clayton, ETFs are among the most popular vehicles investors have used to participate in or hedge against large fluctuations in the stock market. ETFs also give investors access to different investment strategies, some conventional and others unconventional.
Clayton stated, "One out of every three investors holds ETFs. That is a remarkable statistic to think about. Younger investors are particularly drawn to ETFs. According to a survey of ETF investors, so-called 'millennial' investors – between the ages of 25 and 37 – are putting about 36% of their investments into ETFs."
This new rule will only apply to common ETFs and not those that pertain to special interests or are outside the scope of the new proposal.
The proposal does not mention cryptocurrency or blockchain technology, so it remains to be seen whether cryptocurrency-based ETFs will be subject to the new rules.
According to sources, the proposal is not aimed at any investment strategies or asset classes in particular, meaning that a bitcoin ETF would have to satisfy the same requirements as any other ETF.
But the SEC's stance on cryptocurrency/blockchain-based ETFs has been uncertain, so far. In a January letter, Dalia Blass, the director of investment management for the SEC, stated why the commission was reluctant to accept these new ETFs, and outlined questions that need to be answered before they could meet SEC guidelines. These questions centered around liquidity of the funds, the custody and verification of funds, how to deal with cryptocurrencies' ever-changing value, how to deal with hacks, and how to better protect investors.
"The innovative nature of cryptocurrencies and related products, as well as their expected use and utility in our financial markets, means that they are, in many ways, unlike the types of investments that registered funds currently hold in substantial amounts … there are a number of significant investor protection issues that need to be examined before sponsors begin offering these funds to retail investors."
But some in the industry are still hopeful. In a June 8 interview with ETF.com, John Hyland, the global head of exchange-traded products for Bitwise Asset Management, voiced his hope that the SEC will soon approve cryptocurrency and blockchain exchange-traded funds:
"I think we get them sooner rather than later. But I also think that if we don't see any action by the SEC in the next two months, we'll jump to 2019 and beyond. I don't see the SEC going from red light to green light anytime near the midterm election. It'll make them gun-shy.
I handicap the odds of a U.S. ETP in crypto as follows: 20% chance in 2018; 60% chance in 2019; and a 20% chance beyond 2019."
In March of this year, ETHNews reported that the SEC announced exchanges supporting security tokens are required to register with the agency or seek exemption. Later that same month, the director of trading and markets for the SEC declared, "No registered exchanges or alternative trading systems (ATSs) currently support cryptocurrency trading." In April, venture capital firms Andreessen Horowitz and Union Square Ventures met with SEC officials to discuss possible regulatory exemptions for cryptocurrency- and blockchain-related projects.