The SEC is a big beast and one that many financial institutions and brokerages do not wish to take on. Earlier this year, the scandal involving Grayscale and their announcement that they were suing the SEC for their decision to not move forward with their crypto ETF had doused the hopes of not many U.S and foreign investors about accessing the cryptocurrency market. While exchange-traded funds are common around the world as an asset vehicle to incorporate those who do not have the capital, acumen, or knowledge of the financial markets to grow their positions, the SEC is extremely strict on any mention of digital assets.
Other developed markets, such as Canada, have already set the precedent that crypto can intermingle with more traditional assets on the established secondary exchanges. Now, after years of attempting to change the sentiment of the regulators, the SEC has approved Charles Schwab’s prospectus for a crypto-themed ETF. The way that Schwab did this is interesting, and the post will explore Charles Schwab’s underlying assets and techniques.
Crypto-Themed, not Crypto-Based
Schwab was clever with their intention, openly stating that the ETF “would not be investing in cryptocurrency or digital assets directly”, with the key word being “directly”. Instead, Schwab will use the fund in an old technique resembling a fund of funds – or a derivative of that strategy. This stipulates that although the assets would not directly be invested in cryptocurrency and its related content, most of the assets of the fund would invest in companies that are actively making a difference in the space. This could mean that the funds/companies themselves are investing in digital assets or companies that have a financial stake in blockchain and coins through capital exposure.
For example, the fund is currently broken down in the initial prospectus as having 44% of its assets invested in companies in the software industry (which use blockchain and other technologies) – with the other 41% being divested into the financial sector (companies that invest in crypto and associated technologies). So far, the SEC has deemed this fine considering their policy on rejecting all funds that are actively taking unsophisticated investor assets and investing them in coins and projects.
Are Loopholes The Way Forward?
There are two sides to the argument for and against the SEC. The regulator has the utmost duty to keep the integrity of the financial markets from being compromised. While cryptocurrency as an asset seems to be extremely secure within the transacting space of the blockchain, it is difficult to ascertain due diligence, fraud, money laundering, or assessing proper KYP and KYC protocols for the end investor. The SEC fears that funds would bypass all of these requirements but include them in a broad fund.
On the other hand, no one can seem to stop the growth of DeFi, Blockchain, and new players. When large brokerages such as Schwab take a wealth management position in a crypto-themed ETF, it speaks volumes. The way forward seems to be the justification that funds can eke out an advantage by actively searching and finding companies that are actively involved in crypto, mainly in the technological and financial aspects. This should hedge against the fact that most traditional players would be late to the game if they “play by the rules”.
There is a large void created by the SEC in their firm stance against investing directly in cryptocurrency on established exchanges. Giants such as Fidelity and Schwab feel extreme dismay that they are losing out on potentially amazing projects for their clients and their returns.
Sorry, the comment form is closed at this time.