Ever since the Commodity Futures Trading Commission permitted futures exchanges to self-certify bitcoin futures, it has put the Securities and Exchange Commission is between a rock and a hard place regarding crypto-based exchange-traded funds.
Until now, the SEC has had a perfect record of batting down proposed crypto-ETFs, but this distinct ETF filing looks to be the one that will open the sluice gates for crypto ETFs.
The regulator spent most of this year kicking its decision to approve, disapprove, or institute proceedings to determine whether to disapprove Cboe Global Markets’ filing to list VanEck SolidX Bitcoin Trust’s family of ETFs down the road. Now the SEC has run out of road and will need to make its decision by September 30.
Since the Cboe made its filing at the start of the year, there has been little public discussion by this SEC on how it would regulate a listed derivative based on an asset class that has a raison d’être of anonymity.
If the regulator wants to be extremely risk-adverse, it could be highly prescriptive in its regulations and limit the structure and operations of such funds. However, successful prescriptions require a deep understanding of the subject matter, which is something the SEC, and almost any other regulator or organization, currently lacks due to the nascent nature of the market. There is no concensus on how to market assets to market, which indicies funds should reference, or how to custody a fund's assets.
A principles-based approach seems to be the only route forward until the market and regulator can collect enough data on which it could base future prescriptions. Whether the crypto ETF market could last that long without taking itself and the rest of the equities market with it remains a question.
If this were any other market-related topic, the SEC would spend a few years developing a pilot, seeking comments, redesigning the pilot, and seeking more comments before eventually launching the pilot. Then it would sit back for another couple of years collecting and analyzing the data. Unfortunately, this is not an option.
Let us hope that the initial lessons the market learns regarding crypto ETFs will not be expensive ones.