SEC Chairman Says “Door is Wide Open” to Tokenization of ETFs

Jay Clayton, Chairman of the U.S. Securities and Exchange Commission (SEC), says he is willing to facilitate the tokenization of exchange-traded funds (ETFs).

According to International Investment, Clayton said at a conference hosted by the U.S. Chamber of Digital Commerce that he is open to talks about the process of tokenizing ETFs.

The Context of the SEC Chair’s ETF Tokenization Remark

Tokenization refers to the process of creating a token that represents the underlying value of a certain asset. Tokenizing an asset can potentially make it easier to transfer and trade.

In the context of the discussion, Clayton’s statement refers to the representation of existing ETF products through cryptocurrencies or blockchain-based tokens.

Our door is wide open - if you want to tokenise the ETF product in a way that adds efficiency, we want to meet with you and we want to facilitate that. Of course you have to register it and do what you would do with any other ETF.

A tokenized ETF is well within the realm of possible developments, Mason Borda, CEO of security token platform Tokensoft, told the BTC Times.

"Tokensoft and the Tokensoft transfer agent have blazed the trail with the first SEC-registered security tokens. Now that we’ve made this possible, even a tokenized ETF is possible. The first one we got through the SEC was a 40 act Fund, which behaves very similarly to an ETF."

While the immediate implications of Clayton's comments are not clear, there may be a possibility that over time, the general interest around cryptocurrencies and tokenization could spill over into cryptocurrency-specific ETFs. If that was to happen, it could raise the probability of a Bitcoin ETF.

How About a Bitcoin ETF?

The latest Bitcoin ETF was rejected by the SEC on February 27th. The commission pinpointed the concern of market manipulation as its primary reason for turning down NYSE Arca’s Bitcoin ETF proposal.

The Commission concludes that NYSE Arca has not established that the relevant Bitcoin market possesses a resistance to manipulation that is unique beyond that of traditional security or commodity markets such that it is inherently resistant to manipulation.

An argument could be made, however, that the market share of well-regulated Bitcoin exchanges, especially institution-tailored platforms, has been rapidly increasing. For instance, according to data from Skew, institution-focused LMAX Digital is the second-biggest spot exchange in the world, outperformed only by Coinbase.

As the BTC Times previously reported, the inflow into institutional Bitcoin products, including the Grayscale Bitcoin Trust, has also surged significantly in 2020.

As such, the confluence of the SEC considering tokenized ETFs, the growing market share of well-regulated exchanges, and rapidly increasing institutional demand could raise the likelihood of a Bitcoin ETF in the future.