Bull’s Pin or Bear’s Den: How the SEC’s Decisions Influence the Crypto Market
It's an understatement to call the latest declines from the cryptocurrency world a ‘slump', we've effectively seen Ethereum fall to its lowest in a year, with ETH falling to trade below its previously strong support of $300, now trading at $264 with some sideways trading. Meanwhile, Bitcoin has fallen through its $6,500 support and is currently trading at $6,134.
But much like the influence of Donald Trump's Twitter rants on the US stock markets, it's always a challenge to say, to what extent positive or negative news can have an influence on the cryptocurrency market, the Securities and Exchange Commission should be taken into consideration.
The recent example being the SEC's decision to delay any ruling on applications for the creation of a Bitcoin Exchange Traded Fund (ETF) until September, the announcement had something of an effect on the market, despite the fact that many cryptocurrency experts explicitly stated that this would be the most likely scenario.
At the very least, the SEC has been the more influential organization in shaping the opinions of crypto investors, with their statements and decisions resulting in a number of bearish turns or impetuous bull runs.
SEC – DAO Tokens Are Illegal Securities
Crypto Market Reaction – Slightly Bearish
In July 2017, the SEC came to a major decision regarding the condition of DAO tokens, placing its mark of interest in the cryptocurrency market out there for all to see.
During this time, it had conducted an analysis of the organization referred to as the Decentralized Autonomous Organization (DAO). It finally concluded that the tokens, issued through its Initial Token Offering (ICO) in 2016, were to be regarded officially as Securities, and were supposed to register with the SEC before entering any level of distribution to users.
While taken in isolation, this seemed like the SEC getting tough with a company that hadn't played by their rules, the reality was that it had made a statement to the cryptocurrency community: that their eyes were trained on it, and that more ICOs and tokens that just DAO's were in the firing line for the same treatment, an especially cutting message when considering this was during a period of time when the ICO market was a lot more unregulated and ‘wild', so to speak.
When it comes to assessing whether or not an asset constitutes a security or not is by applying the Howey Test, a system of assessment which was developed in 1946. Effectively, it also boils down to one question, which is if a token is marketed as a profit-oriented asset, then it would be referred to as a security in the eyes of the SEC.
The regulatory body has made its stance clear, however, that it intends to provide definitions on a case by case basis so as to avoid wrongfully giving the security definition to a digital token that doesn't conform to it. A number of factors, including economic realities — will determine whether the transaction constitutes the offer or sale of a security.
While the ruling on DAO tokens was not followed up with taking up legal proceedings against the company, the SEC gave a stark message to the cryptocurrency community: that the days of a frenzied, chaotic market would be coming to an end, and that it would be taking measures against cryptos deemed to be acting outside of regulations.
Despite this fear of this signifying an end of an era, major cryptos weren't significantly affected in any meaningful way. On the day of the announcement, there was a slightly bearish turn for the major cryptocurrencies, the effect wasn't significant or long in duration. Ethereum, for example, slipped by 10% before bouncing back up to its previous value.
SEC Denies Second Winkelvoss Application For Bitcoin ETF
Crypto Market Reaction – Slightly Bearish
One of the prospects that's caused a significant buzz, socially speaking, has been the potential for an authority-sanctioned, cryptocurrency-based ETF being recognized and used within the US.
People within the community believe that it would be a profound turning point for cryptocurrencies, opening the door for widespread implementation by businesses and consumers. All the while, the underlying value of cryptos would increase while it enters a new renaissance, metaphorically speaking.
The SEC gets to decide if the industry is ready for an ETF, and the watchdog hasn’t been particularly optimistic thus far.
When it comes to ETF news, especially for cryptocurrencies, the community tends to react quite strongly, so the announcement from the SEC took the community by a relatively negative surprise.
This was made apparent by the regulatory body's decision to deny the Winklevoss twins‘ second attempt at creating a Bitcoin ETF, proving resistant to the twins belief that the Bitcoin market was “inherently resistant to manipulation.”
As previously mentioned, this was the second time that the Winklevoss twins had put forward the prospect of a Bitcoin ETF, the first was proposed back in 2013, and it was one that took the SEC roughly four years to come back to them on regarding a decision. In March of 2017, the SEC gave their negative answer, citing that “significant markets for Bitcoin are unregulated.”
On both of these occasions, the cryptocurrency market reacted negatively to the bad news. During the report of the SEC's rejection of the first proposal in March 2017, Bitcoin slid by $200 in the space of a day before rallying. In July 2018, the decision effectively resulted in the backward slide of Bitcoin by about $400 in the span of two hours but quickly regained the lost ground within 24 hours.
In the statement, Peirce made clear that the agency's decision “sends a strong signal that innovation is unwelcome in our markets, a signal that may have effects far beyond the fate of Bitcoin ETPs [Exchange Traded Products],” in a sense, she alludes to the effect that the SEC has on the market.
SEC Denies VanEck SolidX ETF Request
Crypto Market Reaction – Strong Bearish Downturn
Alongside the already damaging effect of the SEC's decision to postpone its ruling on proposals for a Bitcoin ETF, which includes the proposal brought forward by the investment firm VanEck and the financial services company SolidX, which have also been postponed until September 30th.
Among the applications that were submitted to the SEC, the VanEck SolidX proposal was among one of the most interesting and was generally regarded as the most promising among the crypto-backed ETFs that were put forward.
Where it came from a tag-team of companies which had spearheaded successful mainstream ETFs in the past, it didn't carry any overly ambitious taglines or statements about the state of the market, nor did it fall into the Winklevoss' trapdoor of assuming that Bitcoin is “inherently resistant to manipulation.”
What's more, the VanEck SolidX fund is physically backed, this means that unlike other ETFs, it will physically hold a certain number of bitcoin, lending it an even greater level of credibility. Both companies have also stated that this serves as a method of protecting investors from the potential loss or theft of the cryptocurrency.
According to their filing with the SEC, each share of the VanEck SolidX Bitcoin Trust is set to cost a hefty $200,000. Daniel Gallancy, the SolidX CEO, explained while speaking to CNBC, that the price is set at a higher level, as it has its focus on institutional investors, the fund also hopes to get listed on the Cboe BZX Equities Exchange.
On August 7th, the SEC made an announcement, citing their right to extend the review period they had previously marked out. It had also given mention to the fact that they had received over 1,300 comments on the proposed rule change to list the VanEck SolidX BTC Shares.
Per the document, within 45 days of the filing of a proposed rule change, VanEck SolidX trust had submitted their application on June 6th, or within 90 days, and should the commission deem it necessary, it has the power to approve, disapprove or extend the period of time they use to come to a decision.
While the news was rather more neutral than on previous occasions, and in the minds of many crypto investment experts, what they generally expected would happen, it generated a wider-spread panic, sending major cryptocurrencies into a downward spiral.
This stood as a major smack in the face of investors, as the likes of Bitcoin, which had been steadily climbing towards the $7,000 support, fell back down to $6,500, which it has since receded past as well. Overall, within six hours of the announcement, BTC had fallen by over $500, culminating in a loss of 12% of its total value over the course of the week.
Similarly, other cryptocurrencies felt the sharp edge of the decision. Ripple, for example, fell by as much as 23% over the same span of time.
One thing that served to blunt the sharp fall was the news that the cryptocurrency project, Bakkt was announced by the Intercontinental Exchange (ICE), which operates 23 large global exchanges, including the New York Stock Exchange (NYSE). But rather that put a stop to the bearish trend, it went relatively ignored.
Speaking on an interview with CNBC, Dan Morehead, CEO of Pantera Capital, argued that cryptocurrency investors were ‘overreacting' to the SEC's decision to postpone the ETF hearing. Morehead argued that a series of proposals like this would take some time, highlighting the fact that the cryptocurrency market, unlike any other, was a relatively young area, requiring a greater level of consideration.
The Hedge Fund manager gave a certain amount of perspective to the irrationality of the crypto investment world by stating that the most recent asset which gained SEC approval only recently was copper, a metal that “has been on earth for 10,000 years.”
SEC And CFTC Held A Joint Meeting, Where They Highlighted The Importance Of Cryptocurrencies
Crypto Market Reaction – Strongly Bullish
On February the 6th, the SEC sat down with the Commodities and Futures Trading Commission (CFTC) for a joint hearing, in which session each side went into detail about the importance of the cryptocurrency community, ICOs and blockchain technology as a whole.
During the hearing, both sides gave their fair share of praise to the community for creating a new paradigm within the financial system while stressing the dire need for a strong, yet malleable regulatory framework, famously following up with “if there was no Bitcoin, there would be no blockchain.”
As a result, this hearing was followed by a strong bullish trend, with the crypto community generally reacting with optimism and strong positivity. This was staggering at the time, especially when considering that China had, at the time, reiterated its zero-tolerance policy towards cryptocurrencies and mining activity which had been going on within their country.
This news was also followed by rumors of a ban in India and some mainstream banks prohibiting cryptocurrency purchases with their credit cards. After both the SEC and CFTC showed a relatively positive stance towards cryptocurrencies, both Bitcoin and Ethereum furthered their gains by about 20%, with a number of other cryptocurrencies making their way into the green as well.
SEC Rules That Ethereum And Bitcoin Are Officially Not Securities
Crypto Market Reaction – Slightly Bullish
While there is no clear, single method of approach when it comes to cryptocurrencies and providing a legalistic definition for them. As mentioned previously, while the SEC asserts that it measures cryptos on a case by case basis, its methods remain less than crystal clear.
If one event lays this out plain to the cryptocurrency community, it was the ruling by the SEC that, while many cryptocurrencies should be (and are) defined as securities, both Ethereum and Bitcoin are not technically among them.
This same viewpoint was expressed by Jay Clayton, the chair of the SEC, who argued that Bitcoin couldn't technically be a security, due to the fact that it acts as a replacement for sovereign currencies, adding:
“Replace the dollar, the yen, the euro with Bitcoin. That type of currency is not a security.”
After this news broke for the general public, the overall value of Bitcoin jumped from $7,525 to $7,728 within 24 hours, showing a slight rate of growth at the news.
Within a few days after this statement by Clayton, William Hinman, the director of corporation finance for the SEC, added that Ethereum (ETH) isn't technically a security either, effectively putting an end to a months-long debate about the legal status of these two cryptocurrencies, and one which could have resulted in Ethereum's ICO in 2014 being outlawed.
“Putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions[…] And, as with Bitcoin, applying the disclosure regime of the federal securities laws to current transactions in Ether would seem to add little value.”
That signal was positive for ETH, meaning that it wouldn’t face any charges. Consequently, the coin’s price rose as much as 11 percent, up to $520.68.
The SEC Reminds Crypto Coin Exchanges That They Should Be Registered With The Agency
Crypto Market Reaction – Slightly Bearish
In March 2018, the SEC issued a strong public warning against cryptocurrency coin exchanges, explicitly stating that platforms that take part in buying, selling and trading securities, which the SEC sees cryptos and Altcoins being, “must register with the SEC as a national securities exchange or be exempt from registration.” The statement also followed with:
“The SEC staff has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not. Many platforms refer to themselves as ‘exchanges,’ which can give the misimpression to investors that they are regulated or meet the regulatory standards of a national securities exchange.”
As a result, major cryptocurrency exchanges were urged to comply with the announcement given by the SEC, which would involve conforming to a number of regulatory policies which are commonplace for other more established markets.
These include anti-laundering policies such as ‘Know Your Customer‘ (KYC) and Anti Money laundering (AML) regulations. Since this announcement, major coin exchanges like Coinbase have since attempted to register with the SEC.
The news coincided with a slight downward trend in the market, for example, Bitcoin's overall value slid downward by 8.6% over 24 hours, falling below its previous $10,000 support level. However, the surge could have been initiated by other factors, such as rumors about an alleged Binance security breach that were spreading around the time.