As Financial Firms Bicker Over Bitcoin, the SEC Clouds the Forecast

by on Feb 07, 2018

On January 31st, Bitcoin finally broke the $10,000 mark again, weeks after it fell from its all-time high of nearly $20,000. Whether the increase will last is another question. But it’s not looking likely. Just a few days later, Bitcoin dropped below $6,000.

Bitcoin’s meteoric rise in popularity has not gone unnoticed by financial firms, many of which have begun allowing clients to deal in Bitcoin or related products. E*TRADE, TD Ameritrade, Morgan Stanley and Goldman Sachs now allow clients to trade in Bitcoin futures, while Robinhood will soon introduce cryptocurrency trading, providing access to popular coins like Bitcoin, Ripple and Ether. There have even been asset management firms and exchanges, such as the NYSE, proposing Bitcoin ETFs.

As Bitcoin and other cryptocurrencies continue to cycle through highs and low, the push and pull between the SEC and the brokerage/asset management industry grows stronger. Financial firms that view Bitcoin as a viable financial instrument have been met with responses from the SEC ranging from a wary tolerance (that is unlikely to last) for trading to a hard “No” for Bitcoin ETFs. An SEC spokesperson stated that if Bitcoin ETFs were to come to fruition, they would heavily consider issuing a stop order to protect main street investors—and the SEC has proven that they’re willing to put their words into action. In August and December 2017, it stopped the trading of some Bitcoin stock due to fears that it wasn’t secure.

So why exactly is the SEC so wary of Bitcoin and associated products? The SEC’s reasoning boils down to two main factors: volatility and lack of security. In two months’ time, Bitcoin soared as high as $20,000, only to shortly crash back down to $10,000, reinforcing the belief that Bitcoin is buoyed merely by speculation. By the end of 2017, other cryptocurrencies like Ripple, Ethereum and Litecoin saw double-digit losses as well. Nouriel Roubini, the NYU professor and economist who predicted the 2008 crash, recently called Bitcoin “the mother of all bubbles.”

Twelve applications for cryptocurrency ETFs and two mutual funds were withdrawn just within the last week as the SEC voiced concerns over security. Investors are raising alarm bells about whether Bitfinex and its virtual currency Tether are artificially inflating the price of Bitcoin. South Korea has enacted cryptocurrency regulation, with rumblings of similar measures in the EU, India, Japan, China and the Philippines, so it’s hard to imagine the continuing free reign of cryptocurrency markets in the U.S. According to the SEC, this sort of volatility, coupled with illiquidity, makes it too difficult to determine a fair market price. Even if they could, there’s the issue of protecting the money. The SEC recently filed charges against PlexCoin, which swindled over $15 million from investors. Other companies like BitConnect, accused of running a Ponzi scheme, and YouBit, hacked twice in less than eight months, lost investors millions. Then there’s the issue of Bitcoin Initial Coin Offerings (ICOs). The SEC’s skepticism of ICOs—despite their current legality—is mostly because there is less protection in an unregulated crypto exchange than in a traditional market. Research shows that 10% of all funds raised in an ICO are lost or stolen. In fact, on January 30th, the SEC filed a suit against AriseBank for defrauding investors by issuing unregistered securities during its ICO.

For all the supposed advantages of cryptocurrency exchanges, such as instantaneous trades and increased safety, most crypto exchanges lack the scale to provide these benefits. In Goldman Sachs’ annual outlook letter, Sharmin Mossavar-Rahmani and Brett Nelson point out that supposedly instantaneous trades often take up to 10 days, price discrepancies across 17 U.S. exchanges reached as high as 31% in late 2017, and frequent cyberattacks have not stolen millions, but have destroyed entire exchanges.

It’s important to point out that the SEC isn’t alone in their anti-Bitcoin sentiment. J.P. Morgan CEO, Jamie Dimon, famously called Bitcoin and other virtual currencies a “fraud” despite supporting its underlying platform, blockchain. Vanguard CEO Tim Buckley vowed that clients would never see a Vanguard Bitcoin fund. Merrill Lynch banned their advisors from promoting any products related to Bitcoin. On January 30th, Facebook announced a ban on all ads related to cryptocurrency or related products, including ICOs. So where does that leave Bitcoin?

If it functions the way it’s meant to, virtual currency exchanges would ease the execution of global trade by speeding up the timeline, lower transaction costs and increase safety due to greater transparency. But whether it will ever reach its potential is another question. With the heads of the SEC and CFTC set to testify in front of the Senate Banking Committee on February 6th, we may know if the U.S. sees a future for cryptocurrencies and its products.