A top official at Cboe Global Markets Inc. believes that many of the SEC's worries over cryptocurrency exchange-traded products could be resolved if the regulator treated them like typical commodity-related funds.
In a March 23 letter, Cboe President and COO Chris Concannon wrote that many concerns related to valuation, liquidity, custody, arbitrage and manipulation in underlying cryptocurrency markets could be addressed within the framework in which products like cattle- and gold-based funds operate.
Throughout 2018, the SEC has aired concerns over cryptocurrency-based funds' valuation, liquidity and investor protection mechanisms.
"While cryptocurrency-related holdings raise interesting and unique issues from a disclosure and investor protection perspective, Cboe does not believe that they are so much different as to warrant disparate treatment from other commodity-related funds," Concannon wrote in the letter, which was addressed to SEC Division of Investment Management Director Dalia Blass.
Cboe has been a pioneer in Wall Street's adoption of bitcoin. Bats, an exchange operator acquired by Cboe in early 2017, previously applied with the SEC to begin listing a bitcoin exchange-traded fund.
But the SEC ultimately rejected Bats' proposal, leading Cboe to introduce bitcoin futures products on one of its exchanges. Cboe executives viewed the bitcoin futures products as a means for laying the groundwork for another attempt to list bitcoin ETPs. Cboe's introduction of bitcoin futures was promptly followed by a similar move from its cross-town rival, CME Group Inc.
While futures contracts are largely traded by professional traders and institutions, ETPs have grown to dominate equity markets and retail investors' portfolios alongside the rise of passive investing. A cryptocurrency-based product could open the door for investors to expose their holdings to the volatile, burgeoning and largely unregulated markets for bitcoin and other cryptocurrencies.
Concerns over the underlying cryptocurrency markets were a fixture in a January letter from the SEC's Blass, who at the time asked sponsors of cryptocurrency-based funds to withdraw their proposals. The SEC's letter appeared to dismiss cryptocurrency enthusiasts' hopes for a regulated cryptocurrency ETP, a desire held by several Cboe executives.
"We do not believe that it is appropriate for fund sponsors to initiate registration of funds that intend to invest substantially in cryptocurrency and related products," Blass wrote in the letter.
In his letter, Concannon noted that Cboe does not believe cryptocurrency funds would be suitable for all investors. But an investor protection framework could be created through a combination of "comprehensive risk disclosure in the applicable regulatory documentation" on top of "rigorous broker/dealer evaluation of the suitability of a particular product," he wrote.