SEC Chairman Reveals What Killed the Bitcoin ETF

Jay Clayton, the chairman of the Securities and Exchange Commission, took the stage today at the Consensus: Invest conference and clarified—at least a little bit—his agency’s approach to various looming questions in the regulation of crypto-based assets. Likely the most important insight into the SEC’s thinking were Clayton’s comments on why the SEC has repeatedly chosen not to approve a bitcoin ETF.

A bitcoin ETF—short for exchange-traded fund—would track bitcoin’s price, but trade on a conventional stock exchange, making it easier for average investors to put money into the cryptocurrency. ETFs were created to track commodities like oil, and even currencies like the euro. Rightly or wrongly, many bitcoin holders and advocates think an ETF would generate a huge surge in bitcoin’s market value, but efforts to launch one by figures like the Winklevoss twins have failed so far.

According to Clayton, that’s because bitcoin so far does not fulfill at least two of the SEC’s standards for approving an ETF: A reliable way for the underlying asset to be kept safe (what’s known in industry parlance as ‘custody’), and freedom from price manipulation.

On the custody issue, Clayton cited the persistence of hacks and thefts of digital assets from exchanges and other major holders. The SEC, he said, wanted to be sure that the risk of investing in an assets is a product of actual fluctuations in its value, “not a risk of theft or disappearance.”

But Clayton’s comments about market manipulation were far more cutting for a community that can’t seem to choose between institutional legitimacy and piratical deviance. When interviewer Glenn Hutchins asked him to clarify the difference between manipulation and volatility, citing for comparison the many huge fluctuations in Amazon and Microsoft stock prices, Clayton dropped the hammer:

“Those stocks traded on exchanges where there were rules and surveillance designed to prevent manipulation,” Clayton said. “Those kinds of safeguards do not exist currently in all of the exchange venues where digital assets are traded.”

Many of the largest and most popular crypto exchanges, as well as many small ones, are formally headquartered in countries with minimal regulation and oversight. Observers have again and again seen signs of manipulation, including “wash trading” intended to falsely inflate volume; and “tape painting,” or conspiring to manipulate the price of assets, allegedly including bitcoin.

Clayton’s message was clear: To get a bitcoin ETF, and trigger the flood of new money that some optimists think would follow, crypto will have to clean up sketchy exchanges. That’s an ideological loggerhead, since most crypto die-hards aren’t inclined to advocate for serious regulatory intervention.

It’s also a serious, possibly insurmountable practical hurdle. Short of a unified world government (another thing unlikely to be popular with anarcho-capitalist bitcoiners), there will always be a country somewhere willing to harbor a sketchy exchange. That exchange, in turn, will always be able to attract gullible and/or scummy traders. In the globalized, digitized reality of crypto, a truly clean bitcoin might not be possible—and that could mean a bitcoin ETF isn’t either.