Crypto exchange traded funds (ETFs) being launched make for exciting headlines, but are only one part of the maturation of the crypto sector.
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History is going to be made in U.S. markets with the first ever bitcoin ETF being approved, launched, and beginning to trade, serving as the first such vehicle to be traded on U.S. exchanges. While this product is not the singular answer to the demands for crypto related investment products that some market participants have long advocated for, it is a significant step in the direction toward further proliferation. Put simply, creating a crypto ETF – in whatever form – democratizes access to the crypto space in the form of a tool that is more understandable to non-expert investors. Enthusiasm aside, there is an important caveat for potential investors to realize.
The fact that this first ETF tracks bitcoin futures, which while having received the approval of the Securities and Exchange Commission, is an area that might lead to some market confusion.
Without diving into too much minutia regarding financial products the fact that this first – of possibly many if this initial approval is a sign of things to come – ETF tracks futures could contribute to the following. First, futures do not always track the spot price (the price per bitcoin that investors may see on other apps), and so might generate different returns. Secondly, depending on the futures linked to the ETF – longer term or shorter term as well as the requirement to roll future contracts every month – the returns delivered to different investors might vary from month to month.
That said, the approval of this first ever bitcoin ETF is a significant step forward and clear recognition of how the crypto sector continues to mature and become increasingly integrated with financial markets. Crypto advocates have, and should continue to, applaud this current progress and continue to engage with policymakers.
As if this was not enough, Coinbase recently entered into the regulatory ring by publicly releasing a digital asset policy proposal. There have been any number of conversations, hearings, testimonials, accusations, and discourse around just how the cryptoasset sector is going to be regulated and overseen going forward. The proposal set forward is not perfect, with the repeated call for federally mandated regulation – an extremely centralized and top-down approach – perhaps the most worrisome aspect. Regulation, especially in a fast moving sector, is always going to represent a push and pull between regulators, market participants, and the desire to foster innovation while protecting investors.
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Let’s take a look at a few of the components of this proposal that are the most interesting and worthy of further discussion and refinement.
Creating a new regulator. Kicking off this document is a call to create and empower a newly formed regulator that would have exclusive authority to regulate all cryptoassets, which is both reasonable yet somewhat aspirational. On the one hand it should be self-evident at this point that blockchain-based assets – no matter what moniker is used – function in a fundamental different way from incumbent fiat-based assets. This, in turn, makes the suggestion for a newly formed and specialized regulatory body seemingly a reasonable suggestion.
It is, however, important to note that such an action would take an act of Congress, and with 1) current gridlock and acrimony at the federal level, and 2) the questionable understanding of blockchain and crypto by some lawmakers, this seems to be a desired future outcome versus a short-term goal. Additionally, the call for a federally empowered regulator would also need to be balanced against the potential for regulatory overreach.
Consistent crypto treatment. On top of the issues around the legal and regulatory status of cryptoassets in the wider marketplace, even in the face of continued adoption and utilization, there is an underlying issue that persists. Put simply, cryptoassets are treated differently, are overseen by a number of regulators depending on the application in question, and do not have a consistent regulatory – or financial reporting approach – which continues to hamper understanding and adoption.
Developing a new taxonomy and lexicon around how cryptoassets are to be treated and classified is a clear and logical step toward clarifying the regulatory landscape. To get there, a solid first step toward more transparent and consistent treatment and conversation around cryptoassets and crypto-products is to establish common language and terminology. Such an approach also aligns with calls from organizations such as the Financial Accounting Standards Board (FASB) for input on how accounting and reporting for crypto will continue to evolve.
Self-regulatory organization. An additional point that is worthy of further analysis and conversation, regardless of which entity is the headline publisher of said policy proposal, is that the need for a self-regulatory organization (SRO) is clear. On the surface the idea of an industry or profession having input over regulations might seem contradictory, but examples such as the New York Stock Exchange (NYSE), the American Institute of CPAs (AICPA), and the Financial Industry Regulatory Authority, Inc. (FINRA) are mainstream examples of SROs in the financial sector.
Blockchain and crypto are complicated and fast-moving topics, so having a professionally managed open channel of communication between policymakers and market participants is – and will continue to be – critical to the continued maturation of the space. SROs serve an important in providing interpretative guidance to member organizations, which are almost universally active participants in the markets being regulated in the sector.
Blockchain and cryptoassets have continued to mature, develop, and become integrated within mainstream financial markets at an accelerating rate. Some might say that the shift toward legal and regulatory conversations is a negative development; the opposite is true. To truly achieve understanding and adoption by large swaths of the economy, crypto needs mature products, policy, and transparent mechanisms to communicate this information. The launch of the first ever bitcoin ETF, alongside a worthy first draft for a crypto regulatory regime, are both excellent steps in that direction.
