The chair of the U.S. Securities and Exchange Commission (SEC), Jay Clayton, doesn’t believe that cryptocurrency could be offered on major exchanges until the Bitcoin ecosystem is regulated more strictly. There has been no shortage of tries to take crypto trading mainstream, but they have all met strong resistance due to what regulators deem is too much volatility. This volatility, they assert, is enough for them to not want to create regulations. It’s an odd argument, given the fact that hedge funds, which have been extremely volatile since first being offered almost 70 years ago, are alive and well with no SEC intervention.
The SEC’s position is baffling and more than just a little hypocritical. The commission, as well as other financial regulators, routinely point to violent price swings and cases of fraud, as well as deep investor skepticism, as reasons for not wanting to open the doors for greater crypto trading. All three of those arguments are easily found, on virtually a daily basis, on current markets that invite investors with open arms.
The position also creates a Catch 22 for crypto. The general belief is that regulations would help mitigate most of the risks and the arguments keeping crypto is an unviable alternative in regulators’ eyes. However, those same regulators won’t implement policies until the risks are mitigated.
Speaking at the Delivering Alpha conference, which was presented by CNBC and Institutional Investor, Clayton stated, “If [investors] think there’s the same rigor around that price discovery as there is on the Nasdaq or New York Stock Exchange…they are sorely mistaken. We have to get to a place where we can be confident that trading is better regulated.”
The hedge fund example is pertinent for several reasons. It is an example of an investment that is purely based on risk, offering greater returns against greater risks. Hedge funds are also responsible for a number of financial collapses over the years and a great number have failed. Hedge funds can be offered for virtually anything and have a significant amount of latitude to do almost anything they want, as long as they disclose their strategies up front. They also usually require that investment money be tied up for years, regardless of whether or not the supported elements rise or fall – there’s no good way to exit in a down market, which leads to greater losses.