👩⚖️ SEC on Cryptos 🌊 Coinbase Index Fund — Cryptos for the Rest of Us
Markets continued to trade lower this week with Bitcoin trading below $6,300 at one point. Recent comments from the SEC were taken positively and the markets have had a slight recovery with Bitcoin above $6,600 again.
SEC on Cryptos
What’s the Story?
The SECs point-person for crypto said that Bitcoin and Ethereum are not securities and therefore would not be under the SECs regulatory purview.
William Hinman, head of the Division of Corporation Finance at the SEC, was speaking at the Yahoo All Markets Summit: Crypto conference in San Francisco.
What’s a Security?
The SEC is the US government agency that regulates portions of the financial markets. In particular, they look at securities, which traditionally have meant stocks and options.
According to Hinman, if there is a centralized third party, along with purchasers with an expectation of a return, then it is likely a security
Central to determining whether a security is being sold is how it is being sold and the reasonable expectations of purchasers
Critically the fact that cryptos are decentralised means they do not form a security. In addition, many tokens are an asset purchased for personal use on a network. If individuals purchase Golem (GNT) to access compute power or Basic Attention Token (BAT) to pay for media then it acts more like a golf club membership than a security.
Why Should I Care?
The market took this news positively and it’s been cited as the reason for the slight recovery since the week’s lows.
The SEC has a three-part mission: to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. Where the classification of a crypto falls under the definition of the SEC then it is reasonable for them to get involved.
We stand prepared to provide more formal interpretive or no-action guidance about the proper characterization of a digital asset in a proposed use
It’s likely that we’ll see more guidance from the SEC in the coming months, in particular around ICOs. The SEC has set a global precedent here so it’s reasonable to assume that at least some countries will take a similar stance.
Coinbase Index Fund
What’s the Story?
Coinbase, one of the largest US exchanges recently launched a platform for institutional investors. As part of this, they’ve just launched their Index Fund which will invest in cryptos that Coinbase handles, on a market-cap weighted index.
What’s an Index Fund?
An index fund is an investment vehicle that has systematic investment parameters. It is designed to replicate the returns of the market for a low fee and is known as a ‘passive’ investment vehicle. This contrasts with ‘active’ funds which aim to outperform the market for a high fee.
Index Funds have exploded in popularity in recent years, although the concept has been around since the 70s. Mostly because it’s been proven that on average, individuals are terrible at picking stocks and outperforming the market. With a low-cost, diversified index most people get better returns than trying to pick stocks and time the market.
Why Should I Care?
Diversification is protection against ignorance. It makes little sense if you know what you are doing.
— Warren Buffett
For the average investor, getting enough knowledge to know what you’re doing is hard enough in the stock market. It’s magnitudes harder in the nascent crypto markets. As such, index funds are a fantastic way to hedge against that ignorance while still benefiting from the rise in the market prices.
Unfortunately, the Coinbase Index Fund is only available in the US to accredited investors with a minimum investment of USD250,000.
For investors in Asia, there are a few other options:
- CryptAM offers an index fund that tracks the top 25 cryptocurrencies by market cap
- Node Capital offers an index fund that is designed to outperform a market cap index [disclosure: I work here]
- Emulate an index! For ease, one could invest in just the top 5 cryptocurrencies by market capitalisation and weight your portfolio to these. Just make sure to rebalance every few months to maintain exposure to the top cryptos
Either way, it’s likely we’ll see many such products enter the market in the coming years, both for institutional and retail investors.