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Over the past year, at least 11 bitcoin Exchange Traded Funds (ETFs) applications have been submitted to the SEC, the federal regulatory agency in the United States responsible for protecting investors and maintaining fair functioning of the securities markets. Several significant corporate players, Fidelity and VanEck amongst others, have thrown their weight behind cryptocurrencies and attempted to enter the digital market, sparking debates about what an approval would mean for the crypto and blockchain sphere. Many argue that an approval would facilitate wider adoption of cryptocurrencies, as well as legitimizing them as a new asset type. While this acceptance is something the industry has long strived for, there are prominent risks associated with an ETF approval that must also be considered, not least the creation of a new derivatives market. The SEC should continue to proceed with caution and consider this when weighing up the issue.
The past year has been a watershed moment in crypto history, with the market reaching record highs and events such as the Coinbase public listing and appointment of former digital currencies professor Gary Gensler as chairman of the SEC, leading many to argue that cryptocurrencies are slowly but surely being accepted into the mainstream. Despite historic concerns, the SEC has certainly shifted to a less conservative makeup, making the approval of a bitcoin ETF all the more likely. SEC Commissioner and crypto advocate Hester Pierce recently argued that the agency is asking exchanges for assurances “beyond what it asks for traditional, equity-based products”. She believes that the bitcoin market has matured and is now more like an established entity. Despite this, the SEC has repeatedly delayed its decision on whether to approve an application by VanEck, asking investors and academics to chime in on the potential for an ETF to cause price manipulation.
They are correct to ask this question. Similarly to assets like gold or silver, bitcoin has a fixed supply. Only a set number of coins can ever be brought into existence. This creates an issue because it means that an ETF approval could lead to more bitcoin being traded than is actually available. As such, a new derivatives market could be created, in which the asset being traded would not actually be moved across the market when purchased, instead the bitcoin would be traded using highly leveraged account balances which is debt-laden monopoly money. This could result in a greater amount of bitcoin trading than actually exists – misrepresenting the supply and demand of the underlying BItcoin asset.
Price manipulation and erroneous valuations of market assets is something that must be avoided. Two years ago, a report from Edelman found that financial institutions are considered the least trusted sector on a barometer that featured a host of different industries. The SEC must consider the impact that allowing potential price manipulation into markets could have on the financial systems it aims to protect. The brilliant thing about bitcoin is that it doesn’t exist within the confines of traditional markets. It is an ‘always on’ currency, which allows for trading at any time, from anywhere. Bitcoin was created to exist without intermediaries and external influencers. By trying to mold bitcoin in this way, an ETF is misunderstanding the very nature of the currency.