The U.S. Securities and Exchange Commission (SEC) indicated early in September of 2018 that it would halt trading in two investment products which track the popular digital tokens bitcoin and ethereum. The two products in question, the Bitcoin Tracker One (CXBTF) and Ether Tracker One (CETHF) are each exchange-traded notes (ETNs) issued by XBT Provider AB, a Swedish company and subsidiary of U.K.-based Coinshares Holdings. According to a report by CCN, the SEC cited "a lack of current, consistent and accurate information" pertaining to the two ETNs as a critical reason for its order to halt trading.
For cryptocurrency investors in the U.S. and abroad, this signals the latest move by the SEC to step in and regulate a decentralized industry. The tug-of-war between digital currencies, designed to be traded anonymously and without the enforcement of a central bank or distributor, and more traditional investment products continues to be increasingly complex. What can investors expect to come out of this latest move by the U.S. regulatory agency?
Latest in a History of SEC Actions
One important thing to note is that the SEC's move to ban the Swedish ETNs from trading in the U.S. is not the first time that the agency has stepped in to regulate the cryptocurrency space and its adjacent investment areas. One of the most significant questions about digital currencies — whether or not they can be counted as securities, meaning that they would fall under the purview of various securities laws which have been in existence for decades — was one of the earliest efforts the SEC made to exert control over the industry. After years of back and forth between regulators and leaders of the digital token community, the latest position of the SEC is that most digital tokens themselves do not constitute securities, but initial coin offerings (ICOs), the popular crowdfunding method used to launch tokens and related blockchain-based products.
Another significant issue that the SEC has addressed is the bitcoin- or altcoin-linked exchange-traded fund (ETF). ETFs are among the most popular investment vehicles at this time, and it was only a matter of time before enterprising cryptocurrency leaders attempted to link an ETF to bitcoin or another popular digital currency. As of this writing, the regulator has not approved any bitcoin-based ETF for launch in the U.S. That has not prevented numerous developers from making multiple attempts, however, and enthusiasm and optimism for the prospect of a bitcoin ETF remain high among members of the cryptocurrency space.
The Latest SEC Move
In making a determination to halt the trading of CXBTF and CETHF, both of which have been listed on the Nasdaq Stockholm exchange since 2015 and which entered U.S. markets earlier this year, the SEC explained that "the public interest and protection of investors require a suspension of trading." Regulators elaborated by explaining that "the broker-dealer application materials submitted to enable the offer and sale of these financial products in the United States...characterize them as 'Exchange Traded Funds,'" while "other public sources characterize the instruments as 'Exchange Traded Notes.' By contrast, the issuer characterizes them in its offering materials as 'non-equity linked certificates.'"
It's important to note that the SEC's order was to halt trading, not to remove these products entirely. Ostensibly, the issue, in this case, is that the two products are difficult to characterize. However, cryptocurrency enthusiasts could also interpret the move as an effort to ensure that the SEC retains control over the eventual admission (or lack thereof) of digital currency-related ETFs or ETNs to the U.S. market. When the SEC reveals its postponed decision about the VanEck SolidX bitcoin ETF at the end of September, investors may have more insight as to whether or not the regulator is willing to allow these products in the U.S.