On January 10, 2024, the U.S. Securities and Exchange Commission (SEC) approved, for the first time, Bitcoin exchange traded funds for spot markets.  A link to SEC Chair Gary Gensler‘s announcement is available here. In this post, two crypto experts discuss the SEC’s decision.

The DC Circuit Court of Appeals Approves the First Spot Bitcoin ETF

by Daniel Payne

Although technically approved by the Securities and Exchange Commission on January 10, 2024, the first 11 spot Bitcoin ETFs owe their approval to the D.C. Circuit Court of Appeals.  Until the D.C. Circuit ruled in August 2023 that “the denial of Grayscale’s proposal [for a spot Bitcoin ETF] was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,”[1] the SEC had never seriously contemplated approving a spot Bitcoin ETF.  The first Bitcoin ETF application was filed in 2013 by crypto exchange Gemini.  It was denied, as was Gemini’s second attempt in 2018.[2]  The SEC denied every application for a decade, always citing market manipulation and a lack of investor protection.

But one applicant, Grayscale Investments, LLC, did not accept the SEC’s denial.  It petitioned the D.C. Circuit Court of Appeals for a review of the SEC’s denial order, arguing that the SEC has previously approved ETF products for bitcoin futures and is bound under the law to treat like products alike.  The Court agreed in an opinion that systematically takes apart the SEC’s denial order.[3]  The evidence is clear, though, that the Court’s opinion did little to change the views of the SEC Commissioners responsible for reviewing these ETF applications.  SEC Chair Gensler, the swing vote that turned the denials to approvals,[4] issued a statement that “based on [the D.C. Circuit’s] order, I feel the most sustainable path forward is to approve the listing.”  But he didn’t stop there, closing with a crypto bromide: “bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.”[5]  The SEC therefore appears to have been set on continuing to deny these bitcoin ETFS absent the D.C. Circuit’s impregnable opinion that the SEC’s denials were arbitrary and capricious.  So, if you are looking for who to thank for the spot Bitcoin ETF approvals, start with Grayscale and the D.C. Circuit Court of Appeals.

Footnotes

[1] https://www.cadc.uscourts.gov/internet/opinions.nsf/32C91E3A96E9442285258A1A004FD576/$file/22-1142-2014527.pdf (see p. 2)

[2] https://www.cnbc.com/2018/07/26/winklevoss-twins-bitcoin-etf-rejected-by-sec.html.

[3] See n. 1.

[4] https://twitter.com/EleanorTerrett/status/1745223606538305892. The SEC Commissioners approved the ETFs on a 3-2 vote and the two non-Gensler Commissioners have been critical of the SEC’s past denials.

[5] https://www.sec.gov/news/statement/gensler-statement-spot-bitcoin-011023.

Daniel Payne is a Senior Fellow at the International Congress of Blockchain Advisors and serves as in-house counsel to blockchain brands.

Grayscale’s lawsuit against the SEC Proves a Winning Strategy with the Historic SEC Approval of Spot Bitcoin Exchange Traded Products

by Ijeoma Okoli

There is much debate about the categorization of various cryptoasset products as securities or commodities, and therefore the battle for jurisdiction over vast swaths of the cryptoasset market by the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”).  Categorization issues aside, in recent months a major focus of the cryptoasset market (and sectors of the traditional finance market) has been on whether the SEC will approve a spot Bitcoin exchange traded product.  On January 10, 2024, the multi-year long wait for such a product came to an end with the approval by the SEC of 11 such products for listing and trading on the Nasdaq, NYSE and Cboe BZX markets.[1] In the lead up to, and immediate aftermath of the approval of the spot Bitcoin exchange traded products (“ETPs”), and the commencement of trading of the ETPs on the three regulated exchanges, the price of the underlying cryptoasset product, Bitcoin, soared.[2]  Despite the positive reaction by the market to the news, the approval seemed begrudgingly given by the SEC, evidence of which can be found in the statements from SEC Chair Gary Gensler and SEC Commissioner, Hester Peirce, accompanying the approval. Both acknowledged the invisible but firm hand of the United States Court of Appeals for the District of Columbia Circuit, which ruled against the SEC in a lawsuit brought by Grayscale Investments, LLC, in getting to the approval point.[3] The circuitous route to approval through the courts is both a win and a loss for the US.

It is a loss because of the great amount of time it has taken to get through the SEC, then the courts, and then back to the SEC on the way to approval, as well as the significant costs associated with this long process. This in essence sends a message to entrepreneurs and innovators developing new financial products that they must have the immense resources required to hire an army of lawyers and sustain themselves as they develop products for US consumers and get them to market, costs which could stifle innovation and which could also, if the entrepreneurs survive and are ultimately successful, unfortunately end up being borne by US consumers.  Conversely, the approval is also a win for consumers wanting exposure to Bitcoin because the approval broadens consumer choice and importantly, as Chairman Gensler noted in his aforementioned statement, will provide certain protections for consumers including in the form of (i) mandated disclosure about the products in publicly available registration statements and other filings and (ii) trading of the ETPs on regulated markets which are required to have in place conflict of interest rules and rules designed to prevent fraud and manipulation, and which will be monitored by the SEC to ensure the enforcement of such rules.[4]  These mechanisms will provide consumers with access to information necessary for them to make informed decisions on whether or not to invest in the products, and if they choose to do so, protections to mitigate the risk of loss.

Footnotes

[1] See SEC Order re: Self-Regulatory Organizations; NYSE Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.; 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 (Securities Exchange Act SEC Release No. 34-99306 (Jan. 10, 2024). 

[2] See Macheel, Tanya, Bitcoin rallies to 2-year high of $49,000 then fizzles as crypto ETFs debut, CNBC (January 10, 2024); Warner, Bernhard, Bitcoin Soars on Hopes of Investment Fund Approval, The New York Times (December 5, 2023).

[3] See Peirce, Hester, Out, Damned Spot! Out, I Say!: Statement on Omnibus Approval Order for List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units (January 10, 2024) and Gensler, Gary, Statement on the Approval of Spot Bitcoin Exchange-Traded Products (January 10, 2024).

[4] Gensler, Gary, Statement on the Approval of Spot Bitcoin Exchange-Traded Products (January 10, 2024).

Ijeoma Okoli is a finance and regulatory lawyer and strategic adviser on digital assets; a co-Director of the Digital Economy Initiative and a founding member and limited partner of Impact X Capital Partners. She previously was an Executive Director and Digital Currency Risk Management Lead at JPMorgan.

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