Spot bitcoin ETFs will be in SEC's crosshairs

The SEC has at long last approved spot-price bitcoin ETFs, though it did not do so entirely willingly and will all but certainly be watching product providers very closely.

On Wednesday afternoon, the regulator issued a statement indicating that it had indeed approved a host of exchange-traded products, a development that came a day after its Twitter account was compromised and posted a false announcement that it had done so.

But the SEC moved forward almost entirely because of the results of a lawsuit brought by one applicant, Grayscale, whose request to convert its bitcoin trust into an exchange-traded product had been denied. An appellate court ruling last year found that the SEC didn’t adequately explain why it rejected the application.

“Based on these circumstances and those discussed more fully in the approval order, I feel the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares,” SEC chair Gary Gensler said in a statement.

The decision applies only to ETPs holding bitcoin and does not extend to other cryptocurrencies, he said.

“Investors today can already buy and sell or otherwise gain exposure to bitcoin at a number of brokerage houses, through mutual funds, on national securities exchanges, through peer-to peer payment apps, on non-compliant crypto trading platforms, and, of course, through the Grayscale Bitcoin Trust. Today’s action will include certain protections for investors,” Gensler said.

Those protections include required disclosures from product providers and the fact that the ETPs will be traded on regulated securities exchanges, he noted. Further, because the SEC is evaluating applications for each product separately, the approval process creates a level playing field, he said.

Even so, Gensler cautioned investors about the “speculative” nature of bitcoin, as opposed to holdings in metals ETPs, for example, which have consumer and industrial uses.

“Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing,” he said.

Following the commission votes to approve the applications Wednesday, Commissioner Caroline Crenshaw issued a statement in opposition, saying that the spot markets are “marred by fraud, are heavily concentrated, and lack systemic oversight.

“We rest our laurels on the idea, or hope, that whenever fraud and manipulation in that underlying bitcoin spot market occurs, it should hopefully become apparent in the surveillance of that futures market.  I’m not convinced that such transparency will exist,” Crenshaw said. “Our actions today are not providing investors access to new investments, but instead providing the investments themselves access to new investors in order to prop up their price.”

The commission’s hesitancy in approving the products means it will be watching ETP providers very closely, said Jay Gould, special counsel at law firm Baker Botts.

“I would expect there to be enforcement against some of these guys before too long,” based on disclosures, valuation issues or other potential issues, Gould said. “The SEC is not crazy about this. There’s probably a constituency that thinks this is not a good use of commission resources or capital, [that] it doesn’t create any efficiency in the capital markets – it doesn’t add anything to commerce.”

However, the public interest in bitcoin is undeniable, and the SEC was all but forced to not stand in the way of spot bitcoin ETP approvals, he said. The agency also doesn't want to effectively cede jurisdiction over spot bitcoin products to other countries that are more eager to regulate them, Gould noted.

Leading up to the regulator’s decision today, the queue of applicants began competitively cutting fees before the products were even available. This week, BlackRock, Ark Investment Management, Valkyrie, Invesco, and Wisdom Tree made such fee reductions.

Additionally, Cboe earlier Wednesday published a list of six ETFs that it indicated would begin trading on Thursday, including spot bitcoin products from Ark 21Shares, Fidelity, Franklin Templeton, Invesco, VanEck and WisdomTree. Those disclosures occurred before the SEC issued its decision.

“It’s exciting. I think it will be a real confidence-builder long term for those entities or individuals that were hesitant or reticent to get into the crypto space – it further mainstreams it to have a product that is readily accessible,” said Christopher Gerold, partner at law firm Lowenstein Sandler. That also means that more traditional institutions may be pressured to include it as an asset class when formulating their investment guidelines, Gerold said.

“It took a lawsuit to get here, but hopefully it builds from here and paves the way for better or different regulations that will address the concerns and obstacles that exist,” he said.

Dennis Kelleher, CEO of left-leaning public interest group Better Markets, issued a statement opposing the approvals.

“The crypto industry will almost certainly flood Americans with marketing propaganda suggesting that the SEC’s action legitimized crypto, giving false comfort to retail investors,” Kelleher said. “The SEC must not facilitate the financial carnage that will follow if the crypto industry is allowed to repackage, add a veneer of legitimacy to, and widely disseminate a financial product that is little more than a socially worthless gambling chip.”