The U.S. Securities and Exchange Commission, or SEC, has become more visible about cryptocurrencies and ICO’s, or Initial Coin Offerings, over the past month. It released a statement on December 11 last year and followed up with one last week outlining various concerns and what investors should be doing to protect themselves. While the SEC may not be able to kill or stop cryptocurrencies, it may be able to keep them from moving beyond a niche asset and trading vehicle. (Note that I’ve abbreviated cryptocurrencies as CCs).
What the SEC is trying to avoid from happening
With 1,470 CCs listed on Coinmarketcap.com the industry is ripe for fraudsters to fleece naive investors. About 1,000 CCs are priced below $5, which makes them look like they can deliver huge returns but are ripe for manipulation.
BitConnect, whose symbol is BCC, is a CC that has imploded. It first started trading in January 2017 at $0.16 and seemed to guarantee investors a 40% return per month.
It hit a high of $509.99 on December 17 last year but is now around $20, falling 96% in just over a month. Its decline isn’t related to the SEC as BitConnect closed its lending and exchange platform. Even at $20 it still has a market capitalization of $180 million so there is still a lot of value that could be lost.
The SEC Chairman outlines what an investor should look for
I have tried to summarize the December statement from the SEC’s Chairman, Jay Clayton, with the following excerpts. For those that are thinking about or have invested in CCs I recommend reading the entire statement and the January staff letter.
The first section that caught my eye was “Investors should understand that to date no initial coin offerings have been registered with the SEC. The SEC also has not to date approved for listing and trading any exchange-traded products (such as ETFs) holding cryptocurrencies or other assets related to cryptocurrencies. If any person today tells you otherwise, be especially wary.” (The bolding is in the SEC statement).
Another bolded section is “Please also recognize that these markets span national borders and that significant trading may occur on systems and platforms outside the United States. Your invested funds may quickly travel overseas without your knowledge. As a result, risks can be amplified, including the risk that market regulators, such as the SEC, may not be able to effectively pursue bad actors or recover funds.”
He added, “It is clear that, just as the SEC has a sharp focus on how U.S. dollar, euro and Japanese yen transactions affect our securities markets, we have the same interests and responsibilities with respect to cryptocurrencies.”
This portion gives an indication that the SEC will be vigilant. Clayton said “I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.”
He did make a positive comment about CCs saying “I believe that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects. However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require.”
The statement also includes a list of sample questions an investor should ask.
Last week’s SEC staff letter put a huge damper on CC ETFs
On Thursday last week the SEC issued a staff letter to the Investment Company Institute and The Securities Industry and Financial Markets Association. Both of these groups represent various investment and securities firms.
The SEC’s letter outlined questions in the following areas about investment firms investing in CCs.
- How would CCs be valued to determine a NAV, or Net Asset Value, at the end of each day
- Would a fund have sufficient liquidity in order to provide daily redemptions
- How would custody of the CCs be implemented
- How would an ETF provide fair treatment of investors due to the volatility of CCs
- How would potential manipulation and other risks be mitigated
The letter’s last paragraph started with “Until the questions identified above can be addressed satisfactorily, we do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products, and we have asked sponsors that have registration statements filed for such products to withdraw them.”
It is interesting that the letter was published the day after two ETFs that invest in Blockchain based companies were launched. They are Reality Shares’ Nasdaq NextGen Economy ETF (symbol: BLCN) and Amplify’s Transformational Data Sharing ETF (symbol: BLOK). They had filed with the SEC and did trade last week.