The real reason you could invest in bitcoin futures, but not a bitcoin ETF
If you follow cryptocurrencies, you know that you can now trade bitcoin futures contracts. Yet, for some reason, you cannot buy a bitcoin exchange-traded fund or ETF. Why is that?
Congress is the single biggest reason that you can trade bitcoin futures and binary options, but not bitcoin ETFs. To understand why that is, it’s important to (briefly) describe the current regulatory scheme governing virtual currencies and digital tokens. Cryptocurrencies are a form of decentralized virtual currencies and, therefore, regulated under this regime.
Currently, two U.S. agencies are regulating virtual currencies and digital tokens — the U.S. Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”). The SEC regulates “securities.” The CFTC regulates, among other things, futures contracts and derivatives tied to commodities. Using bitcoin as an example, in the United States, you can buy bitcoin futures contracts and binary options, which fall under the CFTC’s purview, but you can’t buy a bitcoin exchange-traded fund, which falls under the SEC’s purview. So think, CFTC: futures, SEC: securities.
Although the SEC and CFTC are both United States agencies, they have very different approaches to cryptocurrencies. For example, the CFTC chair Christopher Giancarlo dubbed “crypto dad” is very pro-crypto. As you probably deduced from his nickname, Giancarlo is a well-known supporter of financial market innovation and cryptocurrencies. Conversely, SEC Chair Jay Clayton as taken a more conservative approach, repeatedly rejecting requests by exchanges for permission to list bitcoin ETFs on the ground that the underlying sport market exchanges for cryptocurrencies remain unregulated and prone to fraud.
One such attempt to list shares of a bitcoin ETF was the “Winklevoss Bitcoin Trust,” led by Cameron and Tyler Winklevoss, founders of crypto exchange Gemini, and better known for their role (or lack thereof) in Facebook. Citing to investor protection, the SEC rejected the attempt for a bitcoin ETF, indicating that it will not approve cryptocurrency ETFs until the markets demonstrate a degree of stability and security.
Despite agency sentiment for cryptocurrencies, the main reason why bitcoin futures and binary options exist lays within the Commodity Exchange Act, as modified by the Commodity Futures Modernization Act of 2000 (“CFMA”). Under the CFMA, futures exchanges can self-certify new futures contracts while only needing to give the CFTC 24 hours notice to do so. Specifically, futures exchanges may list new futures contracts as long as they self-certify that the proposed futures and derivative contracts comply with the law and are suitable for trading. In other words, the CFMA took away much of the CFTC’s authority to review new futures contracts.
The SEC, however, does not have a similar limitation. Instead, there is an arduous, lengthy process to list new securities — and severe penalties for selling “securities” without seeking the SEC’s approval.
Accordingly, the reason why bitcoin futures exist, but bitcoin ETFs do not, lays in the method by which the instruments are listed, and the roles the SEC and CFTC play in those listings.
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