After first denying that it had approved spot bitcoin exchange-traded products (ETP) following the hacking of the agency’s X/Twitter account, the Securities and Exchange Commission (SEC) announced that it was, in fact, approving multiple applications for the products.
This comes more than 10 years after the filing of the first spot bitcoin ETP application.
According to a Jan. 10 statement by SEC Chairman Gary Gensler, the Commission approved the listing and trading of 11 spot bitcoin ETP shares. Those include:
- the Grayscale Bitcoin Trust, the Bitwise Bitcoin ETF, and the Hashdex Bitcoin ETF on the NYSE;
- the iShares Bitcoin Trust and the Valkyrie Bitcoin Fund under Nasdaq; and
- the ARK 21 Shares Bitcoin ETF, the Invesco Galaxy Bitcoin ETF, the VanEck Bitcoin Trust, the WisdomTree Bitcoin Fund, the Fidelity Wise Origin Bitcoin Fund, and the Franklin Bitcoin ETF under BZX.
In making the announcement, Gensler explained that the Commission had disapproved more than 20 exchange rule filings for spot bitcoin ETPs from 2018 through March 2023, but that circumstances had changed.
While the new set of filings were similar to those disapproved in the past, what changed was that the U.S. Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading of Grayscale’s proposed ETP. Consequently, the court vacated the Grayscale Order and remanded the matter to the Commission.
“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,” Gensler stated in his announcement.
Commissioner Hester Peirce was a little more blunt in her statement, however. “We squandered a decade of opportunities to do our job. If we had applied the standard we use for other commodity-based ETPs, we could have approved these products years ago, but we refused to do so until a court called our bluff,” she stated. “And even now our approval comes only begrudgingly, as demonstrated by our continued insistence that these products satisfy a correlation test we have not demanded of prior commodity-based ETPs.”
Concern About Retirement Accounts
While some industry observers believe the SEC’s approval could help propel the inclusion and acceptance of bitcoin in retirement plans, not all the Commissioners were on board.
In a statement of dissent, Commissioner Caroline Crenshaw said that she is “deeply concerned” about the Commission’s approval, particularly as it relates to protection of retirement accounts. “I am concerned 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,” she stated.
To that end, she explained that she's worried that it will create the “imprimatur” of Commission approval and oversight of the underlying spot markets when really no such oversight exists. “I am concerned that there will be confusion about what exactly these products are – (they are not ETFs registered under the Investment Company Act of 1940, the ubiquitous products that today are used by millions saving for retirement) – and that investors may infer protections that do not in fact exist.”
As to whether the Department of Labor might weigh in on the SEC’s approval of the applications, given its previous warning about investing plan assets in cryptocurrency, American Retirement Association Chief Legal Officer Allison Wielobob offered some perspective.
“Considering the Labor Department’s prior statements on plan investments in cryptocurrency, I would not be surprised if we heard from them on this in some fashion. On the other hand, Labor does not tend to publish superfluous guidance, so perhaps we won’t seem something until they have a real-world example in front of them,” Wielobob explained.
Still No Love for Crypto
Importantly, Gensler noted that the Commission action is “cabined to ETPs holding one non-security commodity, bitcoin,” and that it should in “no way signal the Commission’s willingness to approve listing standards for crypto asset securities.”
Moreover, the approval should not 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, Gensler further explained. “As I’ve said in the past, and without prejudging any one crypto asset, the vast majority of crypto assets are investment contracts and thus subject to the federal securities laws,” he stated.
Investor Protections
The SEC chairman further outlined how the Commission’s approval will include certain protections for investors.
First, he noted, sponsors of bitcoin ETPs will be required to provide full disclosures about the products in public registration statements and required periodic filings. Gensler added that their action does not endorse the disclosed ETP arrangements, such as custody arrangements.
Second, because these products will be listed and traded on registered national securities exchanges, they will be required to have rules designed to prevent fraud and manipulation. The Commission will also be monitoring the registrants closely to ensure they are enforcing those rules, and will fully investigate any fraud or manipulation in the securities markets, including schemes that use social media platforms.
Further, existing rules and standards of conduct will apply to the purchase and sale of the approved ETPs, the chairman further emphasized. This includes, for example, Regulation Best Interest when broker-dealers recommend ETPs to retail investors, as well as a fiduciary duty under the Investment Advisers Act for investment advisers.
Finally, Gensler noted that Commission staff is separately completing the review of registration statements for 10 spot bitcoin ETPs simultaneously, which he suggests will help create a level playing field for issuers and promote fairness and competition.
“While we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin. Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto,” he concluded.
