2017 was a trend-setting year for cryptocurrencies, as hundreds of billions of dollars flowed into the digital asset class. Amid the euphoria, market participants are struggling to reach a consensus about how these new assets will impact the financial system and overall economy.
The cryptocurrency market cap grew by an astonishing 3,330% last year, with dozens of individual coins reaching a valuation of $1 billion or more. The market peaked above $830 billion in January before a month-long correction shaved two-thirds off the total value.
Though highly volatile, cryptocurrencies have had a lasting impact on observers and participants of the market. The growth of bitcoin was too much for the likes of CME Group and CBOE to ignore. The exchanges successfully launched bitcoin futures contracts in December to the dismay of the Futures Industry Association (FIA), which criticized the Commodity Futures Trading Commission (CFTC) for not allowing ‘public transparency and input’ on the new derivatives products.
Multiple fund managers have also submitted formal applications to list bitcoin exchange-traded funds (ETFs) but later rescinded them amid regulatory scrutiny. The U.S. Securities and Exchange Commission (SEC) has taken a tougher stance on crypto-backed funds, citing liquidity and valuation concerns. Last year, the securities regulator rejected two bitcoin ETFs, including one proposed by bitcoin billionaires Cameron and Tyler Winklevoss. The Winklevoss fund has been in the works since 2014.
Although bitcoin ETFs continue to elude the market, thematic funds with exposure to blockchain companies are slowly gaining traction. Just in January, four blockchain-based ETFs entered the market, giving investors a new way to access the crypto revolution. These ETFs include Amplify Transformation Data Sharing ETF (BLOK), Reality Shares Nasdaq NexGen Economy ETF (BLCN), Innovation Shares NextGen Protocol ETF (KOIN), and First Trust Indxx Innovative Transaction & Process ETF (LEGR). As the blockchain economy deepens, there’s strong reason to believe that thematic funds with exposure to this new technology will continue to grow.
That being said, the regulators gave a surprisingly upbeat assessment of the cryptocurrency market at the U.S. Senate Banking Committee hearings in early February. Committee Chair Mike Crapo said that regulators might require more power to promote transparency and order in the market. Currently, cryptocurrency exchanges are regulated at the state level, which means that the CFTC does not have direct jurisdiction save for investigative powers. Meanwhile, the SEC has taken special interest in initial coin offerings (ICOs), and has been keen to remind token issuers of their obligation to follow federal securities laws.
Globally, the regulatory outlook varies substantially. With the notable exceptions of China (which banned cryptocurrencies) and Japan (which granted them the status of money), most nations are still struggling to define the digital asset class. South Korea recently took a bold step by reassuring investors that it would not ban domestic cryptocurrency exchanges but would instead seek new measures to boost market transparency.
Go over one of our previous takes on bitcoin ETFs here to learn more about them.
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