A False Flag for Crypto ETFs

The first bitcoin futures exchange-traded fund in the United States got off to a muddled start last week. The ProShares Bitcoin Strategy ETF made its debut on Oct. 19 to an eager market, with the offering generating $550 million from investors on day one. Although the fund share price climbed nearly 5% in its first day of trading, it closed the week down roughly 3% from its opening of $40.88.

By the end of the week, another bitcoin futures ETF had launched. But note that these are bitcoin futures ETFs, which invest in contracts that speculate on the future price of bitcoin, not actual bitcoin ETFs. From the standpoint of the Securities and Exchange Commission, the distinction matters.

The SEC has hemmed and hawed over cryptocurrency regulatory questions – including bitcoin ETFs – for years. Just a few months ago, we told you about how the SEC’s indecisive approach to crypto regulation was drawing fire from its Republican commissioners. Meanwhile, Massachusetts Sen. Elizabeth Warren signaled she’d like to see the SEC get busy expanding its role in crypto oversight.

For his part, SEC Chair Gary Gensler still doesn’t sound like someone who is comfortable giving digital currencies much of a foothold in the financial system. Having taught a course on cryptocurrency and blockchain technology at the Massachusetts Institute of Technology, he doesn’t lack for knowledge on the subject. In a speech delivered in August at the Aspen Security Forum, Gensler described cryptocurrency as “more like the Wild West” for investors.

“This asset class is rife with fraud, scams, and abuse in certain applications,” Gensler said. “There’s a great deal of hype and spin about how crypto assets work. In many cases, investors aren’t able to get rigorous, balanced, and complete information.”

The fact that these new ETFs are launching doesn’t mean Gensler and the SEC have come to terms with their apprehensions about crypto. On the contrary: The ETFs deal in bitcoin futures, so they sidestep nettlesome regulatory questions.

Specifically, they are buying derivatives available through the Chicago Mercantile Exchange, meaning they are regulated by the Commodity Futures Trading Commission. Moreover, the security issues involved in holding digital assets don’t come into play – hackers don’t try to steal derivatives contracts.

All things considered, then, it makes sense that the SEC’s crypto-skeptical chair would be on board with the agency giving its blessing to bitcoin futures ETFs. They’re a step removed from a bitcoin financial product.

But the crypto floodgates haven’t opened yet. Given how investors gobbled up shares of the bitcoin futures ETFs, financial services companies would certainly love to start selling more funds with exposure to other crypto assets. Without stronger investor protections and safeguards against using crypto to finance illicit activities, however, that isn’t happening any time soon.