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
Today marks the end of an unnecessary, but consequential, saga. More than ten years after the filing of the first spot bitcoin exchange-traded product (“ETP”) application, the Commission finally has approved multiple applications by exchanges to allow the listing and trading of spot bitcoin ETPs. This saga likely would have spanned well beyond a decade were it not for the DC Circuit-ex-machina. You need not be a seasoned securities lawyer to spot the difference in treatment of bitcoin-related ETP applications compared to the many other ETP applications that have been routinely filed and approved over the past decade.
ETPs are an important innovation. Through them, investors can gain exposure to securities and non-securities, such as precious metals, in a convenient vehicle. Even if that exposure is available directly elsewhere, the ETP structure offers its own advantages. ETP shares trade continually on national stock exchanges at market prices, much as regular stocks do. By creating and redeeming shares of the fund, institutional traders, called authorized participants, help to maintain the price of these shares in line with the price of the assets in the investment pool. ETPs are accessible to investors and operate within the framework of the federal securities laws.
Since I became a Commissioner six years ago, one of the questions I have been asked most frequently is “When will the Commission approve a spot bitcoin ETP?” For reasons I have explained many times before, the logic of the long string of denials is perplexing. Predicting approval timelines for spot bitcoin ETPs was impossible because the review process for these filings did not resemble the fairly straightforward processes for approving comparable ETPs. The goalposts kept moving as the Commission slapped “DENIED” on application after application.
Bitcoin-based products have been trading for years under other regulatory regimes. In 2017, for example, the CME and the CBOE, which are regulated by the Commodity Futures Trading Commission, listed bitcoin futures. Foreign jurisdictions have long allowed spot bitcoin ETPs to trade. The Commission should have drawn comfort from the successful launch and smooth trading of these products, even through market stress and volatility. Instead, until today, the Commission remained steadfast in its unwillingness to let spot bitcoin ETPs into US markets.
In the meantime, the Commission has driven retail investors to less efficient means of attaining bitcoin exposure in the securities markets. For example, retail investors could hold it through non-exchange traded products or get some exposure by buying into companies or funds that owned or mined bitcoin. And, in 2021, bitcoin futures exchange-traded funds (“ETFs”), registered under the 1940 Act, started to trade given the Commission had no legal basis for stopping them. In 2022, the Commission approved the trading of bitcoin futures ETPs registered under the 1933 Act. These futures-based products are more complex and more difficult to manage than the spot product, which can translate into higher costs for investors. In any case, the Commission’s basis for letting these products trade should have been an equally compelling basis for letting spot products trade: the correlation between the bitcoin futures prices and the spot prices is high, which means that the regulated futures market is as relevant for a product based on spot bitcoin as it is for a fund investing in bitcoin futures. But, until a court reminded us that our “unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decisionmaking,” we persisted in denying a spot bitcoin ETP.
The Commission, rather than admitting error, offers a weak explanation for its change of heart. In the past, the Commission, allowing our prejudice against the underlying asset to get in the way, has rejected applications on the basis that the bitcoin market was still immature and that there were outstanding manipulation concerns. Today’s approval order notes that the Commission now finds that means for “preventing fraud and manipulation” have been demonstrated because the prices on the CME bitcoin futures market and the spot bitcoin markets have been highly correlated throughout the past two-and-a-half years. We have denied multiple applications over that period, depriving investors of the opportunity to gain exposure to bitcoin in a more convenient and investor-friendly way. The only material change since we last denied a similar application was a judicial rebuke.
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. 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. Perhaps the one silver lining here is now that we know that the Commission can execute a robust correlation analysis, perhaps the road to approving other spot crypto ETPs will not be as bumpy (even if the Commission insists on continuing to apply a test it applies nowhere else).
Today’s order does not undo the many harms created by the disparate treatment of spot bitcoin products.
First, our arbitrary and capricious treatment of applications in this area will continue to harm our reputation far beyond crypto. Diminished trust from the public will inhibit our ability to regulate the markets effectively. This saga will taint future interactions between the industry and our staff and will dampen the rich, informative dialogue that best protects investors.
Second, our disproportionate attention on these filings has diverted limited staff resources away from other mission critical work. Over ten years, likely millions of dollars of staff time has gone toward blocking these applications.
Third, our actions here have muddied people’s understanding of what the SEC’s role is. Congress did not authorize us to tell people whether a particular investment is right for them, but we have abused administrative procedures to withhold investments that we do not like from the public.
Fourth, by failing to follow our normal standards and processes in considering spot bitcoin ETPs, we have created an artificial frenzy around them. Had these products come to market in the way other comparable products typically have, we would have avoided the circus atmosphere in which we now find ourselves.
Fifth, we have alienated a generation of product innovators within our space. Our unreasonable approach to these applications has signaled that regulatory prejudice against new products and services can lead us to sidestep the law and unreasonably delay product launches. The industry has logged hundreds of meetings, has filed submissions, withdrawals and amendments, and ultimately had to resort to a costly legal battle to get us to today.
Although this is a time for reflection, it is also a time for celebration. I am not celebrating bitcoin or bitcoin-related products; what one regulator thinks about bitcoin is irrelevant. I am celebrating the right of American investors to express their thoughts on bitcoin by buying and selling spot bitcoin ETPs. And I am celebrating the perseverance of market participants in trying to bring to market a product they think investors want. I commend applicants’ decade-long persistence in the face of the Commission’s obstruction.
 William Shakespeare, Macbeth (1605-1606).
 Grayscale Investments, LLC v. Sec. and Exch. Comm., No. 22-1142 (Aug. 29, 2023), at 2, available at https://www.cadc.uscourts.gov/internet/opinions.nsf/32C91E3A96E9442285258A1A004FD576/$file/22-1142-2014527.pdf (responding to a challenge by Grayscale, which had sought Commission approval to convert its Bitcoin Trust into an ETP, the court wrote “[t]he denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products”).
 See, e.g., Hester M. Peirce and Mark T. Uyeda, Statement Regarding the Commission’s Disapproval of a Proposed Rule Change to List and Trade Shares of the VanEck Bitcoin Trust (Mar. 10, 2023), available at https://www.sec.gov/news/statement/peirce-uyeda-statement-vaneck-bitcoin-trust-031023; Hester M. Peirce, On the Spot: Remarks at “Regulatory Transparency Project Conference on Regulating the New Crypto Ecosystem: Necessary Regulation or Crippling Future Innovation?” (June 14, 2022), available at https://www.sec.gov/news/speech/peirce-remarks-regulatory-transparency-project-conference; Hester M. Peirce, Dissenting Statement in Response to Release No. 34-88284 (Feb. 26, 2020), available at https://www.sec.gov/news/public-statement/peirce-dissenting-statement-34-88284; Hester M. Peirce, Dissent to Release No. 34-83723 (July 26, 2018), available at https://www.sec.gov/news/public-statement/peirce-dissent-34-83723.
 See Commodity Futures Trading Comm., CFTC Statement on Self-Certification of Bitcoin Products by CME, CFE and Cantor Exchange, Rel No. 7654-17 (Dec. 1, 2017), available at https://www.cftc.gov/PressRoom/PressReleases/7654-17.
 Buying bitcoin directly has always been an option, but it is not a good option for an investor that wants bitcoin exposure through a securities product.
 Grayscale v. SEC at 14.
 See 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 (Jan. 10, 2024) (“Approval Order”) at 9. The Order goes on to state:
[I]n contrast to previous proposals, based on the record before the Commission and the improved quality of the correlation analysis in the record, including the Commission’s own analysis, the Commission is able to conclude that fraud or manipulation that impacts prices in spot bitcoin markets would likely similarly impact CME bitcoin futures prices. And because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the Exchanges’ comprehensive surveillance-sharing agreement with the CME—a U.S. regulated market whose bitcoin futures market is consistently highly correlated to spot bitcoin, albeit not of “significant size” related to spot bitcoin—can be reasonably expected to assist in detecting and deterring fraudulent and manipulative acts and practices in the specific context of the Proposals.
Id. at 10 (footnotes omitted).
 As an example, the filings require cash redemption, as opposed to in-kind redemption, which is standard for similar ETPs. The consequences of this feature may not be favorable for investors. See, e.g., Comment Letter of James J. Angel at 2 (Dec. 12, 2023), available at https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-310539-807962.pdf (“With cash creation/redemption, the ETF (and thus the shareholders) suffers the transaction costs of buying and selling bitcoin. These costs include the bid-ask spread along with the operational costs from the labor and overhead involved in calculating, executing, monitoring, and accounting for transactions in the various bitcoin markets. Costs to ETF shareholders will be lower if the ETF does not have to pay to build a competent trading capacity in bitcoin. Furthermore, there are timing costs involved in the risk that the bitcoin price moves between the time when the NAV is established for a creation/redemption and the time when the bitcoin is traded. Given the high volatility of bitcoin, this is a real risk. There is no reason to force the shareholders to bear this execution risk when it is not necessary.”).
 For an excellent discussion of this issue, see Commissioner Mark T. 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).
 See, e.g., J. Christopher Giancarlo, Remarks at the 4th Annual DC Blockchain Summit: The Digital Trinity: Technology, Markets, and Policy (Mar. 6, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo66 (reflection on the launch of bitcoin futures by then CFTC Chairman Chris Giancarlo, noting that the futures markets enabled many voices to weigh in on the value of bitcoin).