Crypto ETFs in Crosshairs as SEC Targets Coinbase, Binance

Soaring digital currency funds, hopes for spot bitcoin may face roadblocks.

Reviewed by: Lisa Barr
Edited by: Ron Day

The Securities and Exchange Commission’s lawsuits against cryptocurrency exchanges Coinbase Global Inc. and Binance Holdings Ltd. may be a wrench in the works of what had been a soaring part of the exchange-traded fund industry, with rising fund prices and hopes for expanded crypto offerings. 

The SEC Tuesday charged Coinbase, the largest U.S. crypto platform, with “operating as an unregistered securities exchange, broker, and clearing agency,” according to a statement. On Monday, the SEC filed 13 charges against Binance, the world’s largest crypto exchange, including operating unregistered exchanges, misrepresenting trading controls, and the unregistered offer and sale of securities. 

The actions may add up to a difficult road ahead for ETF investors pinning their hopes bitcoin, ethereum and other cryptocurrencies. Crypto and blockchain ETFs have been among the best-performing funds recently: The Global X Blockchain ETF (BKCH) has more than doubled since the year began, while the First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT) has added 60%. Prices of both rose Tuesday. 

“We don’t need more digital currency,” SEC Chairman Gary Gensler said on CNBC Tuesday morning. “We already have digital currency. It’s called the U.S. dollar, it’s called the euro, it’s called the yen. They are all digital now. What’s the real underlying value of these tokens?”  

Both BKCH and CRPT include Coinbase among their largest holdings. Coinbase fell 13% in afternoon trading. According to data, Coinbase is held in 114 ETFs, and the ARK Innovation ETF (ARKK) holds the biggest stake among peers. ARKK has gained 32% this year and also gained Tuesday. 

At the same time, firms are seeking permission to issue new bitcoin ETFs. Most notable has been Grayscale Investment’s effort to create the first spot bitcoin ETF, which has been blocked by the SEC. 

At the heart of the regulatory scrutiny is an issue familiar to financial advisors, and now to the broader investment public: What is a “security?”  

The SEC regulates that question, and determines which ones need to be registered so they can oversee them, like what happens with investment advisory firms: Some must register, and others may not be required to. In the case of crypto exchanges, and securities, the SEC is now putting its thumb down on that scale with greater force than ever. 

Investors have been watching for further crypto regulatory actions since December’s SEC lawsuit against trading platform FTX and its now-infamous founder Sam Bankman-Fried. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.