Crypto Sinks as SEC Issues Statement on ‘Potentially Unlawful’ Online Platforms
The Securities and Exchange Commission issued a statement on Wednesday warning investors of online trading platforms that purport to be “exchanges,” as defined by Federal securities law, but are not in fact regulated.
The SEC staff has a list of concerns but this piece seems especially important: “Many of these platforms give the impression that they perform exchange-like functions by offering order books with updated bid and ask pricing and data about executions on the system…” There is no reason unless explicitly stated that these exchanges function like regulated exchanges like the NYSE or the Nasdaq.
The SEC statement coincided with Coinbase’s launch of its so-called crypto index fund, which will hold all cryptoassets listed on the platform’s GDAX “exchange,” including bitcoin, bitcoin cash, ethereum, and litecoin. They will be weighted by market-capitalization and new cryptos will be added as they are added to GDAX. Bitcoin currently makes up 62% of the fund, ethereum, 27%, bitcoin cash, 7%, and litecoin, 4%.
The idea of a basket of funds is that when one crypto falls, the others will make up for it. But because cryptos have a limited trading history, it is hard to say definitively what the correlation between these cryptos — new and old — actually are. Today, each of the four cryptos in the Coinbase fund have fallen more than 8%. Bitcoin is trading at $9,800.
Investors should not equate Coinbase’s fund with a Vanguard Total Stock Market Index Fund (VTSMX) or a SPDR S&P 500 ETF (SPY), just because it has “index” in its name. Detailed information about the fund lives on the “AM” or asset management part of the Coinbase site as indicated by its domain. This fund is not regulated and “investors should not assume they will be able to resell their interests in any fund,” per Coinbase’s legal disclosure.
That disclaimer may not be enough to keep the SEC from taking a closer look at Coinbase and other crypto trading platforms. Regulators said that those offering digital wallet services, to hold digital assets, could “trigger” other registration requirements. Barron’s reached out to Coinbase on whether it or its GDAX unit plans to register with the SEC, but the company declined to comment. However, a Coinbase spokesperson said that the company plans to amend phrasing on its website that says GDAX is “more on a regulated U.S. based exchange.”
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