SEC and CFTC claim power over regulatory dominance in digital currency markets
The U.S. Securities and Exchange Commission (SEC) has rejected Bitcoin ETF requests in the past. In March, it rejected the Winklevoss Bitcoin Trust, a Bitcoin-based ETF. It also rejected a Bitcoin ETF listing on NYSE Arca by SolidX.
With these rejections the SEC does not allow securities with Bitcoin as the underlying asset to be traded on a national securities exchange, because of its concern that Bitcoin markets are unregulated and susceptible to manipulation.
But recent developments have changed that picture and Bitcoin derivatives are likely to be available to investors much sooner. In July, LedgerX, a cryptocurrency trading platform, was granted permission from the U.S. Commodity Futures Trading Commission (CFTC) to act as a clearing house for cryptocurrency-based derivatives contracts.
Regulatory conflict is not unique to digital currencies. Whether the SEC, the CFTC or both try to claim power over trading in the digital currency markets, potentially there could be a battle for regulatory dominance.
Our take: While the Winklevoss and SolidX Bitcoin ETFs have faced tough times with the SEC, the recent CFTC approval of LedgerX practically allowed it to offer options on Bitcoin to institutional investors this fall, making it the first federally regulated Bitcoin options exchange.
Also, some competition may already be on the horizon for LedgerX. On August 2, the Chicago Board Options Exchange (CBOE) announced it was planning to launch cash-settled Bitcoin futures in the coming months. The futures, which are pending regulatory review by the CFTC, could begin trading in Q4 of this year or early 2018, and would be supported by market data from the Gemini digital asset exchange.
But it looks like the winds are changing, as the SEC rejections were made prior to the LedgerX approval. LedgerX’s stamp of approval by the CFTC is unique and groundbreaking. Bitcoin derivatives will generate significant volume, and this will potentially pave the way to an ETF approval, The debut of Bitcoin options coupled with a recent change in SEC leadership, could signal approvals for Bitcoin EFTs. And if one gets approved, it’s likely that several others will not be far behind.
Other Bitcoin ETF are already positioning themselves for a more favorable shift in the SEC’s view of Bitcoin. On Aug. 11, VanEck filed a proposal with the SEC for an exchange-traded fund called the VanEck Vectors Bitcoin Strategy ETF. The VanEck Bitcoin ETF would be backed by the new Bitcoin derivatives. If approved, the Vaneck Vectors Bitcoin Strategy ETF will be listed on the Nasdaq Stock Market. It will be an actively-managed ETF which does not seek to replicate the performance of any index. VanEck is not the only one, REX also plans a new fund that will invest in Bitcoin-based derivatives. REX has filed two products, specifically REX Bitcoin Strategy ETF and REX Short Bitcoin Strategy ETF.
The CFTC’s stance to Bitcoin differs from that of the SEC. A U.S. federally regulated venue for derivative contracts settling in digital currencies opens the market to a much larger customer base. The SEC and the CFTC may end up sharing power in the digital currency trading space, but the LedgerX approval gives the SEC the precedent it needs to approve future Bitcoin ETF proposals.