Will the SEC save the cryptocurrency industry?
The U.S. Securities and Exchange Commission (SEC) was established by Congress in 1934. Its role is to enforce the nation’s securities laws and protect investors by promoting a fair, orderly and efficient marketplace.
In March, the SEC expanded its oversight to the highly controversial cryptocurrency industry. Cryptocurrencies are digital forms of currency that exist only in electronic form with no physical banknotes or coins. They are not owned or regulated by any single government. Instead, the rules, structure, integrity and amount of each currency is solely determined by the creators of each digital currency.
Currently, there are 2003 different cryptocurrencies. Created in 2009, Bitcoin was the world’s first cryptocurrency and it remains the most popular. However, it was not until 2017 that it reached its apex as a new-age currency and means of transacting commerce.
In the 12-month period ending Dec. 17, 2017, the price of a single Bitcoin had skyrocketed from $790 to more than $20,000 – a 2,400 percent increase. But this hype was short-lived over concerns on its security, legitimacy and viability as an alternative form of currency. In the following five days, Bitcoin’s price fell to just $11,885. Currently, its price is hovering just above $6,000.
At the height of the crypto-craze, retailers such as Overstock.com, Microsoft, Dell and Expedia.com boldly announced they would accept Bitcoin as payment for goods and services. But as retailers quickly found out, cryptocurrencies don’t make for a very good currency, primarily due to their extreme price volatility. Imagine a retailer accepting Bitcoin as payment, only to have its value plummet 10-20 percent in a matter of hours. Along with long processing times and high transaction fees, you can see why many retailers no longer accept, or have temporarily halted, accepting digital currencies.
But the true legacy of cryptocurrencies is that of an ultra-high-risk investment vehicle. In 2017, investors flooded the market to capitalize on their meteoric 1,000-plus percent price gains. However, the continuing theft, fraud, price manipulation and general malfeasance that plagues this industry has sent most investors fleeing. More importantly, it has kept its biggest potential savior – giant Wall Street institutions – flush with mountains of cash, economic leverage and creative resources, from entering the cryptocurrency industry.
For the cryptocurrency industry to thrive, it must shed its continuing ineptness, lack of vision and Wild West image of lawlessness and embrace some form of regulation. To regain a broader acceptance, it must instill a level of confidence with investors. To help with this endeavor, the industry has reached out to the strangest of allies – the SEC – to allow the trading of cryptocurrency exchange-traded funds, or ETFs.
An ETF is a security that tracks the price of a specific asset, such as an index, commodity or basket of individual stocks. For example, the SPDR S&P 500 ETF tracks the performance of the S&P 500. The Energy Select Sector SPDR Fund is an ETF that tracks the performance of 31 energy-related companies such as Exxon Mobil Corporation, Chevron Corporation and Marathon Petroleum Corporation, among others.
ETFs provide low-cost investment exposure to specific areas of the financial markets without the investor having to buy the actual underlying assets. They can be easily bought and sold on U.S. financial exchanges like the New York Stock Exchange and The NASDAQ Stock Market.
For the digital currency industry, the benefits of a cryptocurrency-linked ETF would be immeasurable. Investors could gain exposure to the cryptocurrency markets through their existing investment accounts, bypassing the risk, cost and complexities of the cryptocurrency exchanges. These exchanges serve as a centralized platform for the buying and selling of digital currencies. However, since 2014, more than $1.4 billion of investor funds have been stolen from these exchanges by computer hackers.
So far, the SEC has rejected multiple requests to create a cryptocurrency-linked ETF, citing concerns of volatility, price manipulation and the industry’s general lack of oversight. The SEC’s approval would certainly spark renewed momentum to this beleaguered industry, which remains in a public relations nightmare. But for now, the SEC seems content to just sit this one out.
Mark M. Grywacheski, Investment Advisor
Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.
Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
