In a remarkable turn of events, the U.S. Securities and Exchange Commission (SEC) has finally approved multiple applications for the listing and trading of spot bitcoin Exchange-Traded Products (ETPs). SEC Commissioner Hester Peirce’s recent statement marks the end of a saga that spanned over a decade, signaling a significant shift in the regulatory landscape for cryptocurrencies.
The Long-Awaited Approval
The path to regulatory acceptance for Bitcoin and its related financial products has been a trek through a regulatory wilderness, characterized by intense scrutiny, skepticism, and a series of rejections that often seemed to stem from a fundamental discomfort with the asset class. The first application for a spot Bitcoin Exchange-Traded Fund (ETF) was submitted over a decade ago, embarking on what would become a protracted journey toward regulatory approval.
The spot Bitcoin ETF, unlike Bitcoin futures ETFs, would be backed directly by physical Bitcoin holdings. This direct link to the actual cryptocurrency was a point of contention for the SEC, which had previously expressed concerns about the potential for market manipulation, liquidity, and the ability to adequately safeguard assets. These concerns led to a pattern where Bitcoin-related ETP applications were subjected to a more rigorous and skeptical review process compared to other ETPs, which navigated through the regulatory pathways with comparatively less friction.
Commissioner Hester Peirce, often referred to as “Crypto Mom” for her dissenting opinions favoring cryptocurrency innovation, has been vocal about the SEC’s seemingly inconsistent stance. She pointed out the discrepancy in the SEC’s treatment of Bitcoin-related ETP applications, which appeared to be held to a different standard than other ETPs. Over the years, numerous Bitcoin ETF proposals were submitted to the SEC, only to be met with disapproval or extended delays, leading to a growing sense of frustration within the crypto community and among investors eager for regulated investment vehicles.
The breakthrough came following a legal intervention, which proved to be the deus ex machina for the approval process. This pivotal legal maneuver compelled the SEC to re-evaluate its stance and catalyzed a shift towards a more favorable regulatory disposition. It is unclear what specific legal actions were taken that could be described as a “DC Circuit-ex-machina,” but this term suggests an unexpected and advantageous resolution brought about by the judicial system, possibly referring to a court ruling or a legal precedent that the SEC could no longer overlook.
This legal intervention may have provided the necessary impetus for the SEC to recognize the maturation of the Bitcoin market and the robustness of its underlying infrastructure. The approval signifies an acknowledgment of the sophisticated mechanisms now in place for monitoring and safeguarding the Bitcoin market, which may include enhanced surveillance partnerships and improved liquidity, all of which serve to reduce the risks previously highlighted by the SEC.
The Significance of ETPs
Exchange-Traded Products (ETPs) represent a significant evolution in the investment landscape, serving as vehicles that offer both individual and institutional investors access to a wide array of asset classes through a single tradable security. Unlike mutual funds, which are priced at the end of each trading day, ETPs are bought and sold on national stock exchanges at market-determined prices throughout the trading day, similar to stocks. This continuous trading feature provides investors with the flexibility to react to market movements in real time.
ETPs encompass a variety of investment structures, including Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), and others, each offering exposure to a range of underlying assets. They can track commodities, indices, or baskets of assets. This array of offerings allows investors to gain exposure to markets that may otherwise be difficult or costly to access, such as commodities like gold and silver, or diversified bond portfolios, without the need to physically hold the assets or directly purchase a wide range of securities.
One of the most critical roles in the ETP ecosystem is played by institutional traders known as authorized participants (APs). APs are typically large financial institutions with the capability to create or redeem ETP shares. They facilitate liquidity by taking advantage of arbitrage opportunities that arise when there is a divergence between the market price of the ETP shares and the net asset value (NAV) of the underlying assets. If the ETP’s market price deviates from its NAV, APs can either purchase the underlying assets and exchange them for new ETP shares (if the ETP’s price is below its NAV) or do the opposite by redeeming ETP shares for the underlying assets (if the ETP’s price is above its NAV). This mechanism ensures that the ETP price remains close to its true value, enhancing market efficiency and fairness.
Additionally, ETPs can offer cost advantages over traditional mutual funds. They generally have lower expense ratios, due in part to the passive management style of many ETPs, which typically track an index rather than relying on active management. Moreover, the creation and redemption process of ETP shares is usually in-kind, meaning it involves the exchange of securities rather than cash, which can result in lower capital gains taxes for the investors.
Operating within the regulatory framework of federal securities laws, ETPs provide transparency and protection to investors. They are required to disclose their holdings daily, allowing investors to see exactly what assets they are exposed to and to make informed decisions accordingly.
Commission’s Previously Perplexing Logic
For years, the SEC’s logic in denying spot bitcoin ETPs was perplexing to many, including Commissioner Peirce. The review process for these filings deviated significantly from the standard procedures for other ETPs, with constantly moving goalposts leading to successive denials.
Bitcoin-based products have been trading under other regulatory regimes, such as the CME and CBOE futures, since 2017. Foreign jurisdictions have also allowed trading of spot bitcoin ETPs, yet the SEC had remained unwilling to let similar products into the US markets, citing concerns over market immaturity and manipulation.
The SEC’s Change of Heart
The SEC’s recent approval acknowledges the strong correlation between CME bitcoin futures market prices and spot bitcoin markets, demonstrating means for “preventing fraud and manipulation.” This recognition contradicts the SEC’s earlier stance, with Commissioner Peirce criticizing the Commission for denying similar applications in the past and driving retail investors to less efficient means of attaining bitcoin exposure.
The Commission’s Missed Opportunities
The SEC’s delay in approving these products has been costly, diverting staff resources and creating confusion about the SEC’s role. It also led to an “artificial frenzy” around spot bitcoin ETPs and alienated product innovators. However, the approval is a step forward, validating the right of American investors to engage with spot bitcoin ETPs and celebrating the perseverance of market participants.
Commissioner Peirce’s reflections on the SEC’s approval of spot bitcoin ETPs underscore the complexities and challenges in regulating emerging financial products. While the approval does not undo the past harms caused by the SEC’s disparate treatment, it opens a new chapter for cryptocurrency investments, marking a milestone in the journey towards integrating digital assets into mainstream finance.
- Lucy Walker is a journalist that covers finance, health and beauty since 2014. She has been writing for various online publications.
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