Crypto suffered another setback on Wall Street this past weekend

Sep 10, 2018

On Sunday night, the SEC announced the suspension of trading for Bitcoin Tracker One and Ether Tracker One, a pair of exchange-traded notes (ETNs) managed by a subsidiary of CoinShares Holdings. The ETNs have been trading on international exchanges since 2015 but only gained approval in the US about a month ago.

The SEC’s official statement cited “a lack of current, consistent and accurate information.” It then elaborated by saying, “The broker-dealer application materials submitted to enable the offer and sale of these financial products in the United States, as well as certain trading websites, characterize them as ‘Exchange Traded Funds.’ 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.’”

This decision is important for three reasons:

  1. The CoinShares ETNs are one of the only ways for US-based public market investors to gain exposure to digital assets. While the SEC is focused on fulfilling their mandate and protecting investors, the suspension cuts off an important capital inflow path from the public markets to crypto.
  2. The current Bitcoin and crypto ETF applications aren’t likely to get approved if the SEC is suspending trading of existing crypto-related exchange-traded products. With that said, the Bitcoin & Ether Tracker One decisions appear to be in response to issues with their specific filings, rather than the underlying asset class. Unfortunately, the nuanced differences may not matter to regulators at such an early point in the market.
  3. Legacy Wall Street banks are relatively risk-averse. They are unlikely to rush into a market that continues to see regulatory scrutiny, including highly visible approval, denial, and/or suspension decisions. Regardless of the merits or reasoning for this suspension, it grants traditional financial institutions another excuse to delay their participation.
    The SEC is making the right decision here though. The focus should not be on racing to market, but rather on ensuring healthy, sustainable products in the crypto asset class. An eleven day suspension of trading is much better than delisting products or refusing to approve future applications. Regulators continue to be fairly tempered in their approach to digital assets.

Citigroup is the latest to enter the mix. Rumors have surfaced that the investment bank is considering the launch of a “digital American Depository Receipt (ADR)” product that would allow US investors to trade and settle Bitcoin.

The idea is that Citigroup’s product would fit into a defined (and accepted) regulatory framework that is familiar to regulators. ADRs are traditionally used to offer American investors the opportunity to trade in foreign securities without exposing them to the risks or inconveniences of transacting across borders or currencies.

If Citi can build and launch digital ADRs, US-based public market investors would be empowered to buy and sell Bitcoin without the risks or inconveniences of transacting on cryptocurrency exchanges and OTC desks. Theoretically this creative approach sounds like a great idea, but it comes with a word of caution — it is essential that each tradeable product is tied directly to Bitcoin and sidesteps the creation of more digital ADRs than available Bitcoin.

It is exciting to see so many organizations and teams trying to solve the same problem. Some will successfully navigate the technical and regulatory hurdles to offer US-based public market investors access to digital assets. Others will be unsuccessful. Either way, one thing is certain: The race for innovation in the US financial markets is alive and well.

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