SEC’s Letter: Questions and concerns about cryptocurrency exchange-traded funds (ETFs)

On January 18th, the Securities and Exchange Commission (SEC) released a Staff Letter addressed to the Investment Company Institute and the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA).

The letter outlined the SEC’s concerns about cryptocurrency exchange-traded funds (ETFs). Specifically, the letter stated that there are “significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the [Investment Company Act of 1940] and its rules.”

The letter identified 5 specific areas of concern:

  • Valuation
  • Liquidity
  • Custody
  • Arbitrage
  • Potential manipulation and other risks

The letter posed several questions under each area of concern, some of which are: (i) What are the policies and procedures to determine the fair value of cryptocurrency related products? (ii) How would funds classify the liquidity of cryptocurrencies and cryptocurrency related products? (iii) How would the custody requirements be satisfied for cryptocurrency holdings?  (iv) How would the fragmented, volatile and high-volume trading characteristics of cryptocurrencies allow ETFs to comply with market price requirements? and (v) How will ETFs ensure investor protection with cryptocurrencies that have a higher opportunity for fraud and manipulation than traditional securities?

The letter concluded by saying the SEC does “not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products” until the questions in the letter are satisfactorily addressed. The SEC also stated that it has requested that sponsors withdraw registration statements that have already been filed for such products.

The full letter can be found here:

Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings

https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm

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