The U.S Securities and Exchange Commission (SEC) on Sept. 9 issued a notice suspending trading in the securities Bitcoin Tracker One (CXBTF) and Ether Tracker One (CETHF). The commission's notice cited the “confusion amongst market participants regarding these instruments". The stay commenced on Sept. 9th and will be in force until Sept. 20. 

Bitcoin Tracker One and Ether Tracker One provide exposure to the performance of bitcoin and ether (BTC/USD, ETH/USD) before a fee. The objective of the product is to provide a daily return approximately equivalent to the performance of bitcoin and ether across the three most liquid digital exchanges as selected by the product provider, before fees, and costs. 

Why was this emergency order delivered? "It appears to the SEC that there is a lack of current, consistent and accurate information concerning Bitcoin Tracker One and Ether Tracker One issued by XBT Provider AB (publ)", the watchdog’s website said. "A Swedish company headquartered in Stockholm, resulting in confusion amongst market participants regarding these financial instruments."

The SEC quoted an example of the said confusion wherein the broker-dealer application materials were submitted to enable the offer and sale of these financial products (CXBTF and CETHF) in the United States, as well as certain trading websites which characterized them as “Exchange Traded Funds (ETF).” Other public sources characterized the instruments as “Exchange Traded Notes (ETN).”

By contrast, the issuer characterizes them in its offering materials as “non-equity linked certificates.”  CXBTF and CETHF are also listed and trade on the NASDAQ/OMX in Stockholm and have recently been quoted on OTC Link (previously “Pink Sheets”) operated by OTC Markets Group, Inc.

What is the difference between ETFs and ETNs and what should CXBTF and CETHF be classified as?

ETNs are structured products that are issued as senior debt notes and more like bonds in that they are unsecured. ETFs serve a stake in an underlying commodity, they provide investments into a fund that holds the assets it tracks, like stocks, bonds or gold.

At present, these products (CXBTF and CETHF) are sometimes called ETFs, but that term generally relates to a different and often more stringently regulated product. Some industry experts, including the largest ETF provider BlackRock Inc (BLK.N), have called for regulators to standardize the terms used to describe ETFs and other kinds of investment products.

The SEC in July rejected a second attempt by the Winklevoss brothers to list their bitcoin ETF, highlighting its concerns about investor protection. 

Various industry influencers took to social media to state their stance on the SEC order.

Gabor Gurbacs, director of Digital Assets Strategy at VanEck/MVIS, whose Bitcoin ETF approval is kept on hold until Sept. 30, tweed on the SEC decision:

Further, the SEC also cautioned the broker-dealers, shareholders, and prospective purchasers that "they should carefully consider the foregoing information along with all other currently available information and any information subsequently issued by the company." Also that they "should be alert to the fact that, pursuant to Rule 15c2-11 under the Exchange Act, at the termination of the trading suspension, no quotation may be entered unless and until they have strictly complied with all of the provisions of the rule".

Rule 15c2-11 of the Exchange Act requires broker or dealers to submit information and specify the basis and factors considered in establishing their initial priced entries for a non-Nasdaq over-the-counter equity security to the National Association Of Securities Dealers.

The information that has to be submitted under this section includes things like the broker-dealer must have in its possession a prospectus, a copy of the offering circular provided, latest annual report, and must have in its possession the issuer’s latest annual report.

The SEC’s order comes under the purview of Section 12(k) of the Securities Exchange Act of 1934 which is called the "Emergency Order of the Securities Exchange Act of 1934 Taking Temporary Action To Respond To Market Developments". This emergency order "grants the commission the authority, in the event of certain major market disturbances, to issue summarily orders to alter, supplement, suspend, or impose requirements or restrictions with respect to matters or actions subject to regulation by the Commission".