After Tuesday’s speech by Gary Gensler, the Chair of the Securities and Exchange Commission, hopes for a U.S.-listed Bitcoin ETF increased. However, his strong remarks about the need for more regulation within the crypto space dampened the optimism.
Bitcoin Futures ETF Favored
Gensler’s most prominent comments regarding ETF investors were about the possibility of a U.S-listed cryptocurrency ETF.
Gensler acknowledged the existence of cryptocurrency investment vehicles, such as the $22 billion Grayscale Bitcoin Trust and the newly launched Bitcoin Strategy ProFund. Gensler seemed to be able to see the strong demand for crypto ETFs. These have many benefits over existing products.
Gensler stated that he anticipates filings regarding exchange-traded funds in accordance with the Investment Company Act (’40 Act). The ’40 Act, when combined with other federal securities laws provides substantial investor protections.
Catalyst for Change
He said: “Given these important safeguards, I look forward the staff’s reviewing such filings,” especially if they are limited to these CME traded bitcoin futures.
Gensler might prefer ETFs that are bitcoin futures-based to ETFs that directly own bitcoin. This is based on the comments. We may soon see an influx of new filings if that is the case. Currently, out of the dozen outstanding bitcoin ETF filings, only one is for a futures-based product.
Gensler’s remarks on crypto ETFs are important but they were only a part of a broad-ranging speech he delivered at the Aspen Security Forum on the crypto industry.
He stated that he had thoroughly researched the technology behind blockchains and was looking for a promising future in the space.
“Before I started at the SEC, it was an honor to research, write, and teach about the intersection of finance & technology at the Massachusetts Institute of Technology. These included courses in crypto finance, blockchain technology, and money.
Like “The Wild West”
Gensler said, “In that work I came to believe, though there was much hype masquerading in the crypto industry, [bitcoin founder] Nakamoto’s innovation is real.” It has been, and will continue to be, a catalyst for financial and money change.
He was positive about crypto’s potential, but he stated that crypto assets, including bitcoins, are ‘highly speculation stores of value’.
Gensler says that this is perfectly fine. ‘Good-faith actors have been speculating about the value of silver and gold for thousands of years.’ But, unlike the market in precious metals, crypto assets exist in a world that’s’more like a Wild West’, with widespread fraud, abuse, hype, and spin in the asset class.
He emphasized that crypto doesn’t offer enough protection for investors.
Vulnerable To Price Manipulation
Gensler was especially interested in the regulation of crypto tokens that he considers securities but which are not subject to the existing regulatory system.
“I believe that we now have a cryptocurrency market where many tokens could be unregistered securities without required disclosures and market oversight. This makes prices vulnerable to manipulation. Investors are vulnerable,” explained the chair of SEC.
Gensler also included stablecoins, crypto tokens that are tied to fiat currencies such as the dollar in this potential-securities bucket. He said that stablecoins are one of the most traded crypto assets. However, without proper oversight they could allow money laundering, tax evasion, and the avoidance or sanctions.
Gensler also targeted decentralized finance platforms (DeFi), which facilitate intermediaryless financial services such as the lending, borrowing and trading of crypto assets. He stated that if these platforms deal in securities assets, they must register with the SEC, unless they qualify for an exemption.
More regulatory powers are needed
DeFi platforms are independent protocols that can’t be operated by any one entity. There has been much debate over whether they can be effectively regulated. Gensler seems to believe they can.
Gensler was optimistic about the SEC’s ability bring the crypto industry under regulation, but he also noted that Congress needs to address some regulatory gaps.
“We need more congressional authority to ensure that transactions, products, and platforms do not fall between the regulatory cracks. This volatile and growing sector requires additional resources to protect investors.
“Right now, large portions of the crypto industry are not operating within-regulatory structures that protect investors, consumers, guard against illegal activity, ensure financial stability, and protect national security.
“Standing astride doesn’t make it a sustainable place.” If you want to encourage innovation in crypto, I would like to point out that financial innovations have never thrived outside of our public policies frameworks.
Trust is at the heart of finance. Investor protection is at the heart and soul of trust in markets. Gensler stated that if this field is to survive or be used as a catalyst for positive change, it was important to incorporate it into the public policy frameworks.