SEC Orders Temporary Halt to Bitcoin ETN Trading

The U.S. Securities and Exchange Commission (SEC) on Sunday ordered trading in two cryptocurrency securities suspended due to “confusion amongst market participants regarding these instruments.” The order became effective at 5:30 p.m. ET Sunday and terminates at 11:59 p.m. on September 20.

The securities involved are Bitcoin Tracker One (CXBTF) and Ether Tracker One (CETHF), both of which are exchange traded notes (ETNs) issued by XBT Provider AB, a Sweden-based subsidiary of U.K.-based CoinShares Holdings. The ETNs have traded on the Nasdaq Stockholm exchange in Swedish kroner since 2015. Last month both initiated U.S. dollar-denominated quotes.

In its announcement, the SEC said:

The Commission cautions broker-dealers, shareholders, and prospective purchasers that they should carefully consider the foregoing information [of the suspension in trading] along with all other currently available information and any information subsequently issued by the company.

The SEC warned broker-dealers that even when the temporary suspension ends, “no quotation may be entered unless and until they have strictly complied” with the appropriate SEC rule. If broker-dealers enter into any quotation that violates that rule, “the Commission will consider the need for prompt enforcement action.”

In its order, the SEC noted:

[T]he broker-dealer application materials submitted to enable the offer and sale of these financial products in the United States, as well as certain trading websites, characterize them as “Exchange Traded Funds.” Other public sources characterize the instruments as “Exchange Traded Notes.” By contrast, the issuer characterizes them in its offering materials as “non-equity linked certificates.”

Unlike exchange traded funds (ETFs), ETNs are not backed by any assets. Rather, they are debt instruments backed by the note’s issuer. In this case, XBT Provider AB issues the ETNs and CoinShares Holdings purchases the necessary amount of cryptocurrency to back the notes.

The SEC has declined to approve any crypto-backed ETF, citing a section of the Securities Exchange Act includes requiring the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices. Whether or not the ETN offerings also ran afoul of that restriction is not clear, but the “confusion” the SEC cited Sunday probably comes close.