Why the SEC has suspended trading in Crypto ETFs

On Sunday, Sept. 9, the Securities And Exchange Commission (SEC) temporarily suspended trading in the U.S. shares of two investment vehicles that track cryptocurrencies, due to concerns of “confusion amongst market participants,” according to an SEC statement.

The two products affected by the halt are the Bitcoin Tracker One (CXBTF) and the Ether Tracker One (CETHF), two Swedish-listed exchange-traded products that track the price of their respective cryptocurrencies, minus expenses. The two products had recently become available to U.S. investors last month.

The temporary suspension, which lasts 11 days, started at 5:30 p.m. ET on Sept. 9 and will end at 11:59 p.m. ET on Sept. 20. (Investors looking to liquidate their positions with the issuer or with other non-U.S. traders may still be able to do so, however.)

Is It An ETF Or An ETN?

The Bitcoin Tracker One and Ether Tracker One products list on the Nasdaq Nordic exchange in Stockholm. As of last month, however, U.S. investors could access shares of the products in U.S. dollars, via over-the-counter (OTC) trading.

In its statement, the SEC wrote that the lack of “current, consistent and accurate information” about CXBTF and CETHF was the motivation behind the trading halt.

Specifically, confusion existed over precisely how to classify these products. Some broker-dealers and trading platforms referred to CXBTF and CETHF as exchange-traded funds, while others referred to them as exchange-traded notes.

Discrepancy even exists among the makers of the products. XBT Provider AB, issuer of CXBTF and CETHF, refers to the products on its website as “non-equity linked certificates.” However, XBT Provider AB’s parent company, CoinShares, refers to the products on its website as “Exchange Traded Notes (certificates).”

As a result, wrote the SEC, “The Commission is of the opinion that the public interest and the protection of investors require a suspension of trading” in CXBTF and CETHF.

New Way To Capitalize On Crypto

CXBTF and CETHF are the U.S. shares of Bitcoin Tracker One and Ether Tracker One, which track the performance of the two respective cryptocurrencies in Swedish krona. As Sumit Roy reported last month, the shares are cleared, custodied and settled in Sweden, but are quoted and executed in U.S. dollars.

There are also versions of the Bitcoin Tracker and Ether Tracker products that are benchmarked to the euro, though no U.S. shares of these products are yet available.

All told, the four bitcoin and ether products currently have $402 million in assets under management.

Launched in 2015, the Bitcoin Tracker One was the first bitcoin-tracking security to trade on a regulated exchange. When the Ether Tracker One launched in 2017, it became the first ether-tracking security to do the same.

Paperwork Problem

In issuing the trading halt, the SEC cited Rule 15c2-11 of the Securities Exchange Act of 1934, a provision that governs what paperwork is necessary to submit and publish quotes for certain OTC securities.

According to the rule, brokers and dealers must have certain documents in hand before working up quotes for pink sheet securities, including a recently filed prospectus, copies of the latest 10-K and other SEC filings and other financial statements. Without that, broker-dealers aren’t legally allowed to offer quotes.

After the trading suspension for CBXTF and CETHF is lifted, broker-dealers must have their paperwork in order, says the SEC. Those who enter quotations in violation of the rule invite “prompt enforcement action,” according to the statement.

“This is a fast-changing area of the securities markets, and the SEC is definitely playing a game of ‘catch-up,'” wrote John Dellaportas, co-chair of Kelley Drye’s Securities Litigation and Enforcement Practice, in an email statement. “Today’s trading halt is just for ten days to allow the parties to get their paperwork in order. We’ll have to see if something more develops from that.”

GBTC Unaffected

Even before the trading suspension, shares of CXBTF and CETHF were difficult for most investors to access. Only a handful of brokerage platforms offered them to trade, including Fidelity, E-Trade and Interactive Brokers, according to data compiled by James Seyffart of Bloomberg Intelligence.

These platforms often exacted hefty transaction fees on top of the products’ significant annual expenses of 2.50%.

Notably, the SEC’s ruling does not impact trading in the only other exchange-traded cryptoasset vehicle, the Grayscale Bitcoin Investment Trust (GBTC). GBTC is a physically backed bitcoin trust that trades OTC that, in the absence of a cryptocurrency ETF, has attracted the lion’s share of investor attention. To date, GBTC has $1.39 billion in assets under management.

However, as a quasi-closed-end fund, GBTC routinely trades with significant premiums. According to Bloomberg, as of Sept. 10, GBTC’s 52-week premium was 56.6%.

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