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SEC's Jackson: Cryptocurrency markets 'far too young' for products such as ETFs

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SEC's Jackson: Cryptocurrency markets 'far too young' for products such as ETFs

? Voting down a recently proposed bitcoin exchange-traded fund was not a close call, Commissioner Robert Jackson Jr. said.

Peirce, part 1: ETFs would help stabilize underlying bitcoin market

Jackson, part 1: Cryptocurrency markets 'far too young' for products like ETFs

Peirce, part 2: Court's limit on collection efforts could push SEC to work faster

Jackson, part 2: SEC seeking to 'fix' unfavorable Supreme Court collection ruling

? Jackson believes the cryptocurrency market is "far too young" for markets to appropriately understand it.

? The SEC's fake cryptocurrency page got more hits in its first 24 hours than any page in the agency's history.

On Jan. 11, the Securities and Exchange Commission swore in Robert Jackson Jr. and Hester Peirce as its two newest commissioners. Jackson, a Democrat, previously worked as a law professor at New York University and was special deputy master for TARP executive compensation. Since taking the role at Wall Street's top regulator, he has targeted companies' use of "forever shares" and spoken out in favor of more climate-related disclosures.

Jackson has also been adamant about stronger investor protections. In July, he was one of the votes on the majority opinion to again strike down a proposal from Tyler and Cameron Winklevoss to list a bitcoin exchange-traded fund.

Commissioners Jackson and Peirce spoke separately with S&P Global Market Intelligence about that decision and the broader cryptocurrency marketplace. Part two of both conversations will be released Aug. 13. The following is an edited version of the first part of Jackson's conversation.

SNL Image
SEC Commissioner Robert Jackson Jr.
Source: The Securities and Exchange Commission

S&P Global Market Intelligence: Why did you rule against the Winklevoss proposed bitcoin ETF?

Commissioner Robert Jackson Jr.: The majority opinion laid out several important factors regarding why we declined to approve it. Most of that market is traded overseas, there's no transparency whatsoever and volumes are small enough that those markets could easily be manipulated.

With great respect to my colleagues, I didn't think that decision was an especially close call. In my view, it wasn't a close question as to whether that product was safe for investors.

We need to be very careful and very sensitive about putting the stamp of the United States and the SEC on an investment product because people around the world would like very much to have our stamp of approval and to use it to hurt investors.

Do you agree with Commissioner Peirce's assertion that an exchange-traded product yields greater transparency in the bitcoin market?

No. The idea that we take a risky, darkly traded product, put it into another product and put the stamp of the United States on it, and that this would somehow lead to greater transparency, is exactly the kind of blind faith in markets that gets investors hurt.

I'm not aware of any facts or basis that suggests if we put this stuff in an ETF, all of the problems with it would be cured. There is nothing about the use of an ETF that would necessarily lead to more transparency and discipline in the way the product is traded.

Are you worried that the slow pace of regulation could put the U.S. behind other countries' innovation efforts?

No. For 80 years, we have regulated the issuance of securities in the United States and have had the deepest, most liquid capital markets that are the envy of the world. The idea that we might somehow fall behind by protecting the American people from dangerous investments is contrary to that entire history.

The reason that people want their product to be traded in America is because of the worldwide credibility that comes with those markets. One of the most valuable assets our markets have is the fact that to be traded in the United States, to be approved by the SEC, you have to be serious about protecting investors and following the rules.

What is your reaction to the increasing involvement in cryptocurrency markets from traditional financial institutions?

Innovation in this area is very exciting, and this technology has a lot of potential to help grow our economy and our securities markets.

The involvement of significant institutions in the area is a good step forward. But the question is, what can those institutions do to make the markets more predictable, more safe, more transparent? The answer is, we don't know.

The idea that we take this very dangerous thing and put it in a traditional American financial institution and cure all the problems is like imagining that the way to kill a virus is to put it into a healthy host. My understanding is that it works the other way.

You want to make sure that the institution that's taking on this new kind of asset truly understands and appreciates the value. These markets are far too young for anybody to draw that conclusion. Do I think that these markets could someday be ready for all of these steps that folks are hoping to take? Absolutely. I believe they can, and I hope they do.

There has been a lot of concern about fraudulent initial coin offerings. Do you think the SEC has been appropriately vigilant in that space?

I agree with Chairman [Jay] Clayton that I personally have not yet seen an ICO proposal that doesn't meet the definition of a security. That doesn't mean that I never will.

I think we're doing all we can to be appropriately vigilant, but we need to do more to protect people getting hurt by these products. A few months ago, the SEC launched the Howey Coin initiative, a fake ICO with a white paper. In the first 24 hours after Howey Coin was launched, that page got more hits than any page in the history of the Securities and Exchange Commission.

That should tell you how scary it is out there right now for ordinary investors, and how far we have to go and how much work we have to do to make sure they're protected.