Overview
On January 10, 2024, the Securities and Exchange Commission (“SEC” or the “Commission”) approved the listing and trading of eleven spot bitcoin exchange traded products (“ETPs”). [1]The Commission declared effective the registration statements for ten of the ETPs on the same date. This long-awaited approval stands in contrast to the SEC’s sixteen prior denials of similarly situated spot bitcoin ETP applications between 2018 and 2023. In this post, we highlight five observations on the immediate, near term, and post-2024 impact this decision will have on the SEC’s regulatory approach to crypto.
First, the approval of these ETP applications does not signal a shift in posture by the SEC towards the crypto industry. Absent the D.C. Circuit’s Grayscale decision, the applications would not have been approved.
The approval vote was comprised of an unusual, and undoubtedly short-lived, alliance among Chair Gensler and the two Republican SEC Commissioners: Hester Peirce and Mark Uyeda. Two Democratic Commissioners, Caroline Crenshaw and Jaimie Lizarraga, dissented in this decision. The Commissioners’ public statements all make clear that the approval was the direct result of the August 2023 decision by the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) in Grayscale v. SEC.[2] In Grayscale, the D.C. Circuit vacated the Commission’s 2023 order denying an application for the listing and trading of the Grayscale Bitcoin Trust. In a unanimous decision, the three judge D.C. Circuit panel determined that the SEC’s denial of the Grayscale application was arbitrary and capricious because the Commission failed to reasonably explain why it approved the listing and trading of two bitcoin futures ETPs but not Grayscale’s similar proposed bitcoin ETP.
Chair Gensler’s statement suggests that he felt compelled to vote in favor of the now-approved applications due to the D.C. Circuit’s Grayscale decision.[3] Commissioner Peirce, who has long argued that bitcoin ETP applications should have been approved, including those previously denied, explained the catalyst for the recent approval as “D.C. Circuit-ex-machina.” Commissioner Crenshaw expressed disagreement with the D.C. Circuit’s reasoning, but acknowledged that the only factor that has changed since the Commission’s last denial of a spot bitcoin ETP is the Grayscale decision.
While the Grayscale decision led Chair Gensler to determine that “the most sustainable path forward is to approve,”[4] he clearly remains wary of bitcoin and crypto more generally. For example, Chair Gensler warned that “bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.” These concerns were echoed and amplified in Commissioner Crenshaw’s statement. Chair Gensler’s fundamental concerns with crypto clearly remain front of mind and will continue to guide his decision-making when approaching the crypto industry.
Second, the outcome will not affect the SEC’s enforcement strategy against crypto trading platforms.
Chair Gensler directly addressed this issue, stating the Approval Order “should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities. Nor does the approval signal anything about the Commission’s views as to the status of other crypto assets under the federal securities laws or about the current state of non-compliance of certain crypto asset market participants with the federal securities laws.”[5]
Notably, the Commission avoids making findings in the Approval Order regarding the ability of spot crypto trading platforms to address market manipulation or fraud. With respect to the applications that originally identified surveillance-sharing agreements with Coinbase, the Commission noted that the amended applications “no longer reference these agreements,” and that such agreements “are not a basis for approval.”[6] It is unclear whether the SEC requested the applications to remove references to the surveillance-sharing agreements. Regardless, there is nothing in the Approval Order that suggests a change in the SEC’s enforcement strategy against crypto trading platforms is forthcoming.
Third, the Commission is unlikely to expand the analysis underlying the approval to other spot crypto ETPs during the rest of Chair Gensler’s tenure.
While the Commissioners disagreed on whether the applications should be approved, they shared bipartisan dissatisfaction with the SEC’s shifting standards used to evaluate spot bitcoin ETPs.
For context, Section 6(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) requires that a national securities exchange’s rules be designed to “prevent fraudulent and manipulative acts and practices.”[7] In prior denials of spot bitcoin ETP applications, the Commission stated that this obligation could be met by demonstrating that the exchange has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying bitcoin. The Commission has determined that every application has failed this test, including the applications approved on January 10, 2024. Only twice has the Commission determined the significant market test to be satisfied: in the context of bitcoin futures ETP applications. As noted above, the different treatment by the Commission of these two similar products (the bitcoin futures ETPs and spot bitcoin ETPs) was the basis for the D.C. Circuit’s Grayscale decision.
In the Approval Order, the Commission adopted an “other means” test for determining that a national securities exchange’s rules are designed to prevent fraudulent and manipulative acts and practices under Section 6(b)(5) of the Exchange Act. Despite referencing “other means,” the Commission’s new test continues to focus on the adequacy of the surveillance-sharing agreement. The Commission evaluated a correlation analysis in the record and conducted its own correlation analysis to conclude that “fraud or manipulation that impacts prices in spot bitcoin markets would likely similarly impact [Chicago Mercantile Exchange (“CME”)] bitcoin futures prices. And because the CME’s surveillance can assist in detecting those impacts on the CME bitcoin futures prices, the Exchanges’ comprehensive surveillance-sharing agreement with the CME . . can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices.”[8]
Commissioner Uyeda lamented that the Commission “decided to disregard the D.C. Circuit” by failing to address the shortcomings of the significant market test and invented a new, previously unarticulated standard.[9] Commissioner Peirce commented that the SEC “offers a weak explanation” for the change in outcome and urges the Commission to simply use the same standard applied to all other commodity-based ETPs.[10] Commissioner Crenshaw highlighted that “we are creating a new standard—but it is not clear exactly what this standard is.”[11]
The bottom line is that the Commission’s new standard is just as malleable and unpredictable as its initial “significant market” test. Applicants for spot ethereum ETPs can expect to spend significant resources to re-create the Commission’s correlation analysis in the Approval Order. Given the shifting standards applied since 2018 and the vociferous opposition to the current tests by three Commissioners, applicants for ethereum- and other crypto asset ETPs should not assume that the standards in the Approval Order will be the only applicable standard in the future.
Fourth, the Commissioner statements reveal a deep divide over the Commission’s mission and previews the starkly different stances towards crypto that the SEC may adopt after the 2024 election.
Commissioner Peirce summarized the last decade of denial orders as demonstrating the failure of the Commission to do its job. Specifically, Commissioner Peirce asserted that the experience has resulted in “diminished trust from the public,” and that the SEC “alienated a generation of product innovators.”[12] Declining to endorse bitcoin or bitcoin-related products, Commissioner Peirce celebrated “the right of American investors to express their thoughts on bitcoin by buying and selling spot bitcoin ETPs.”[13]
In contrast, Commissioner Crenshaw voiced deep concern with the Approval Order, particularly “that these products will flood the markets and land squarely in the retirement accounts of U.S. households who can least afford to lose their savings to the fraud and manipulation that appears prevalent in the spot bitcoin markets and will impact the ETPs.”[14] In addition to these investor protection concerns, Commissioner Crenshaw argued that the SEC did not adequately address whether the rules were designed to protect the public interest, noting the use of bitcoin by criminals to evade sanctions, to demand ransom payments, and to fund our geopolitical rivals or adversaries.[15]
Regardless of the outcome of the upcoming Presidential election, it will likely result in a new SEC Chair being appointed in 2025. Whomever the next Chair is, there will be tremendous pressure to adhere to one or the other end of the spectrum: either adopting a regulatory philosophy towards crypto rooted in investor choice, innovation, and liberty, or a regulatory philosophy towards crypto that is hyper focused on investor protection and the implementation of merits-based oversight.
Fifth, the approval marks the formal arrival of traditional financial institutions to the crypto industry.
Household names of asset managers, national securities exchanges, and broker-dealers appear throughout the spot bitcoin ETP filings. To the extent these bitcoin ETPs prove to be popular products with investors over time, these financial institutions’ interest in the products and expanding to other crypto investment vehicles will only grow. While it will take time, eventually these institutions will begin taking greater interest in policy debates surrounding crypto in Washington, D.C. This will introduce a different dynamic and could have consequential effects on crypto regulatory policy in the years to come.
[1] See Sec. & Exch. Comm’n, Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, to List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units, Release No. 34-00306 (Jan. 10, 2024), available at https://www.sec.gov/files/rules/sro/nysearca/2024/34-99306.pdf (hereinafter the “Approval Order”)
[2] See Grayscale Invs., LLC v. Sec. & Exch. Comm’n, No. 22-1142 (D.C. Cir. Aug. 29, 2023), available at https://www.cadc.uscourts.gov/internet/opinions.nsf/32C91E3A96E9442285258A1A004FD576/$file/22-1142-2014527.pdf.
[3] See Statement, Sec. & Exch. Comm’n Chair Gary Gensler, Statement on the Approval of Spot Bitcoin Exchange-Traded Products (Jan. 10, 2024), available at https://www.sec.gov/news/statement/gensler-statement-spot-bitcoin-011023.
[6] Approval Order at 10–11, fn 41.
[9] See Statement, Sec. & Exch. Comm’n Commissioner Mark Uyeda, Statement Regarding the Commission’s Approval of Proposed Rule Changes to List and Trade Shares of Spot Bitcoin Exchange-Traded Products (Jan. 10, 2024), available at https://www.sec.gov/news/statement/uyeda-statement-spot-bitcoin-011023.
[10] See Statement, Sec. & Exch. Comm’n Commissioner Hester Peirce, Out, Damned Spot! Out, I Say!: Statement on Omnibus Approval Order for List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units (Jan. 10, 2024), available at https://www.sec.gov/news/statement/peirce-statement-spot-bitcoin-011023.
[11] See Statement, Sec. & Exch. Comm’n Commissioner Caroline Crenshaw, Statement Dissenting from Approval of Proposed Rule Changes to List and Trade Spot Bitcoin Exchange-Traded Products (Jan. 10, 2024), available at https://www.sec.gov/news/statement/crenshaw-statement-spot-bitcoin-011023.
[12] Commissioner Peirce Statement, supra note 10.
