SEC-Approved Bitcoin Derivatives Advance

The trading of bitcoin- and other token-based securities on listed exchanges are closer to reality as the US Securities and Exchange Commission’s Fixed-Income Market Structure Advisory Committee prepares to recommend streamlining the classification of exchange-traded products with two new asset classes.

The Commission rejected nine bitcoin ETF applications earlier this year because they need not meet the definition of an ETF under the Investment Company Act of 1940, Dalia Blass, director of the SEC’s Division of Investment Management testified before the House Financial Services Committee’s Subcommittee on Capital Markets, Securities, and Investing in late September.

“An ETF is an investment company, which comes under the 40 Act and has to comply with the mandates of the 40 Act,” she said. “An ETP is usually a commodity pool and comes to market the same way an operating company would come to market. They’re different products, so it is important to understand the differences.”

Although the discussions during the FIMSAC’s final meeting for 2018 did not address cryptocurrencies and tokens directly, the FIMSAC’s Subcommittee on ETFs and Bond Funds may have offered the Commission an ETF workaround by suggesting the creation of exchange-traded commodities, a new instrument that would contain physical commodities as well as commodity futures.

Since the new securities would not be registered investment companies, they would not be subject to the Commission’s proposed Rule 6c-11 for the creation of new ETFs without exemptive orders, noted the authors of the subcommittee’s draft recommendation letter.

“By doing so, we believe that it would help educate investors with the risks associated with each of those products,” said Lynn Martin, president and COO at ICE Data Services and member of the FIMSAC subcommittee.

The subcommittee also suggested that the SEC create exchange-traded instruments. These securities would be registered investment companies and have “embedded structural features designed to deliver performance that will not track the full unlevered positive return of the underlying index or exposure over a specific period, as a day exposure,” according to the draft letter.