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SEC and CFTC Take Opposing Views on Whether Bitcoin is Ready for Mainstream Investors

Traders Magazine Online News, August 24, 2017

David Dinkins

In an article that appeared first on The CoinTelegraph, author and market pundit David Dinkins discussed bitcoin, the cyber currency that is taking certain parts of the market by storm. In this op-ed, he examines how two U.S. regulators are viewing the currency’s worthiness for investors.

“In February, the Securities and Exchange Commission (SEC) issued its eagerly awaited ruling on the Winklevoss Bitcoin ETF proposal: denied. Finance and media pundits and immediately declared that Bitcoin wasn’t ready for the mainstream, and Bitcoin's price quickly dropped. But then something strange happened: shortly after the reject, the price of Bitcoin began soaring, from around $1,100 at the time of the ETF decision to $3,430 today.

Along the way, something even stranger happened. A different regulator, the Commodities Futures Trading Commission (CFTC), approved LedgerX’s proposal to launch a regulated Bitcoin futures market.

Who are these regulators, and why are they at odds over Bitcoin’s future?

SEC’s history and mission

Following the stock market crash of 1929, Congress began considering how best to regulate the securities market. In 1933, the Securities and Exchange Commission was established with a mission to:

“Protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.”

The SEC is entrusted with regulating securities, such as stocks, CDs and bonds. They also regulate exchange-traded funds or ETFs. These are a special type of security designed to track an underlying market. In this case, the Winklevoss ETF would have tracked the underlying value of Bitcoin by buying and selling Bitcoin every time ETF shares were bought and sold.

CFTC’s history and mission

The CFTC was created in 1974 to regulate the booming futures market. Futures are a type of instrument called a "derivative" whose value is derived from that of an underlying asset. When the CFTC was created, most futures trading involved the agricultural industry. Farmers and ranchers have historically relied on futures contracts to protect themselves from market uncertainty.

A farmer might sell a futures contract for one bushel of corn at the price of $3.60. The farmer is now obligated to sell his corn to the holder of the contract at a price of $3.60. If the price of corn goes up between the time the contract is executed and the harvest, the buyer of the future makes money. If the price goes down, the buyer of the future loses money. Either way, the amount the farmer receives for his corn is locked in, allowing him to plan accordingly.

The mission of the CFTC is somewhat different from that of the SEC:

“To foster open, transparent, competitive and financially sound markets...the Commission aims to protect market users and their funds, consumers and the public from fraud, manipulation, and abusive practices related to derivatives and other products.”

SEC denies Bitcoin ETF

The SEC produced a 38-page memorandum explaining its denial of the Winklevoss ETF in February. The SEC’s primary problem with the ETF was the unregulated nature of Bitcoin markets, generally. The SEC wrote:

“The Commission has [previously] emphasized the importance of surveillance-sharing agreements between the national securities exchange listing and trading [the ETF]...and significant markets relating to the underlying asset.”

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