The denizens of Wall Street are always looking for new avenues to make money or for the next new sector of trading to yield untold riches, but when the powers that be in government are deliberately constraining their ability to profit, then concerns can get raised to a fair the well. It just so happens that a few outspoken insiders are blaming the SEC for blocking their path to new riches, i.e., the next explosion in exchange-traded funds (ETFs) that will engulf crypto-assets and broaden access to the general public for a safe, diversified way to invest in the crypto revolution.
If untold management fees are to be created, then the SEC has to change its present positioning on accepting a BTC ETF application, or the investment vehicles will find support in more receptive jurisdictions, taking their billions in fees with them, or so goes the current argument. Why has the SEC been so intransigent? In one word, it feels “uncomfortable”. Crypto controls are not up to snuff in its estimation.
Per Jay Clayton, the Chairman of the SEC: “What I’m concerned about at the moment is if it can be reasonably demonstrated that the underlying trading is generally not manipulated, it’s happening on reliable venues with good rules and that custody is something we can feel comfortable about.” He is not speaking about blockchain technology, which is secure, but about the hodge-podge of unregulated crypto exchanges that dot the planet, some 250 by the latest estimate. These exchanges have been subject to major compromises because most of them do not have the necessary security and operating standards that are given in most traditional trading venues.
The good news is that there are changes afoot in the marketplace. The Bakkt and ErisX exchanges are being designed from the bottom up to include every feature that traditional equity exchanges take for granted. Custodial services and monitoring software that can detect potential attempts at price manipulation will be standard issue. Security protocols will be top of the line, and each exchange will be fully regulated from Day One. Both exchanges have been designed with the institutional investor in mind, providing the tools and features that these investors expect. Other exchanges will have to respond in kind or get out of the way.
Up to now, the SEC has turned down as many as a dozen BTC ETF applications over the last 18 months. Several applications were withdrawn before the agency could even act, but in each case, Clayton cited his same mantra, as above. Existing exchanges, to a degree, are being subsidized by this decision, since investors and traders must come to their door to do business. ETFs would draw volumes away from existing exchanges and bypass many of the compromise issues that confound investors today.
The first ETF on American shores opened for business in 1989. Within 25 years, this burgeoning industry had blossomed to include more than $2 trillion worth of securities under management and the advisory fees that go along with such arrangements. The same explosion of growth could also transpire in the crypto arena, if only given half a chance. Perhaps, 2019 will be the year for a change of heart at the SEC.