SEC vs Bitcoin ETF Approval: What Roadblocks are Making the Governing Body Timid for Acceptance?
Since inception, the United States Securities and Exchange Commission (SEC), hasn’t been very excited or supportive of cryptocurrency. For a very long time, the SEC almost consciously forced people away from the sector citing many different reasons including exploitation, decentralization, and manipulation.
The SEC’s Neutrality
The SEC complained that the very decentralized nature of cryptocurrency can have negative effects on its users leaving them open to abuse. Now, it would seem like the commission has soft-pedaled a little on its “hatred” for crypto but even in its proclaimed neutrality, it hasn’t let go completely.
The commission, at the moment, is still very unwilling to approve a Bitcoin Exchange Traded Fund (ETF). According to Jay Clayton, the commission’s chairman, one of the biggest issues affecting their stand on crypto is manipulation. Clayton said
“What I’m concerned about at the moment is if it can be reasonably demonstrated that the underlying trading is generally not manipulated, it’s happening on reliable venues with good rules and that custody is something we can feel comfortable about.”
Since manipulation is not exclusive to crypto and happens quite regularly in other financial markets including stock and Forex, one has to wonder why this is reason enough for the SEC to hold back. However, maybe the fact that, according to Clayton, the other markets are more “reliable venues with good rules” makes it easier to accept manipulation with them, than with the crypto market.
It would be unfair to say conclusively that the SEC has completely ruled out crypto and will definitely not be approving a Bitcoin ETF, however, it’s important to note that the kind of reliability and stability that the SEC is used to, will probably never happen with crypto.
Normally, most other markets are not very volatile and unstable and this relative stability does make the market a lot harder to manipulate. Cryptocurrencies, on the other hand, are extremely volatile, with the ability to shoot up and down in very short periods. People who hold crypto can easily gain or lose money very quickly and nothing can be controlled. Regulation in other markets reduces risk quite considerably and for a sector that is so decentralized and volatile, it’s no surprise that the SEC is quite apprehensive.
Liquidity in Cryptocurrency
Any kind of financial market, whether crypto or traditional, is very prone to manipulation. Though some more than others, they all experience different levels of doctored news, carefully crafted publications, and artificially created FUD. When these things happen, unsuspecting customers end up reacting directly, either hodling or dumping.
Other forms of manipulation include front-running and deliberately faking influencing trading volumes – causing the general public to react in a way favorable to them. There is also the practice of wash trading which sees investors simultaneously buying and selling the exact same assets to create artificial volumes and mislead people about the success or failure of a particular exchange or asset.
Since these forms of manipulation happen in traditional markets as well, the only difference between those and the crypto market just might be liquidity. Basically, liquidity describes the degree to which an asset can be changed into fiat cash and vice versa. Generally, assets that are very liquid are a lot less unstable and more difficult to manipulate.
Cryptocurrencies are not very liquid and Bitcoin, as illiquid as it is, is probably still more liquid than most other altcoins. The major issue with this is that when there’s very low liquidity, the value of an asset can be more easily swayed or manipulated. This can happen when one or more whales decide to take action on their assets whether by pumping or dumping. Actions like these are known to directly cause either a shocking surge or a flash crash.
Manipulation is also easier with crypto because most of the trades in the market today, happen on the first few biggest exchange firms in the market. The rest, even though some trading does go on, cannot affect the market like the few majorities. So, if there’s a flash crash on one or two of the biggest firms handling most of the market, the price of the asset everywhere will almost definitely take a hit.
It’s important to note here that this price instability isn’t always a terrible thing. When prices shoot up dramatically, everyone cheers. People are only upset when this same volatility drives down the prices.
The cryptocurrency market is still very young compared to other traditional markets. It is generally hoped that maybe in a few more years, crypto liquidity might improve. If that happens, many non-crypto stakeholders might feel more comfortable in the crypto market, eventually causing the SEC to approve. Until then, the SEC might not budge.