Eleven spot bitcoin-based exchange-traded products (ETPs) were finally approved by the Securities and Exchange Commission (SEC) on January 10, 2024, after multiple such ETPs had been rejected by the SEC over the last ten years. This followed an August 29, 2023 order by the US Court of Appeals for the District of Columbia (USCA) holding that the SEC’s prior non-approval of such an ETP sponsored by Grayscale Investments, LLC was “arbitrary and capricious.”
As a result, United States-based institutional and retail investors can now purchase securities representing direct exposure to the spot bitcoin market without custodying the bitcoin. The issuers of the ETPs will be the ones who actually purchase and, through a third-party custodian, custody the bitcoin to back the issuance of the spot bitcoin ETPs to investors. Bitcoin-based ETPs have previously been authorized by certain foreign regulators, including the Ontario Securities Commission and the Australian Securities Exchange.
The key issue that informed prior rejections and the novel approval of the spot bitcoin ETPs is that the SEC now concludes that the proposals include sufficient means of preventing fraud and manipulation as required under Section 6(b)(5) of the Securities Exchange Act of 1934, as amended. The proposals asserted that this burden was met through surveillance-sharing agreements with the Chicago Mercantile Exchange (CME), where bitcoin futures ETPs are currently traded, to assist in deterring and detecting fraud. However, in its prior rejections of spot bitcoin ETP proposals, the SEC had concluded that the CME market was not a “significant market” as it related to the potential new spot bitcoin ETP since CME only permits trading of bitcoin futures ETPs and does not directly surveil the spot bitcoin ETP market.
Last August, the USCA determined that the SEC could not adequately reconcile its rejection of Grayscale’s spot bitcoin ETP with its prior approval of two bitcoin futures ETPs, which also used the CME as a surveillance partner, given the material similarity of spot and futures bitcoin ETP prices. (Click here for a more detailed discussion of that prior decision.)
Notably, the SEC did not rest its approval on proposals of two of the three exchanges to enter surveillance-sharing agreements with the Coinbase digital assets trading platform, where spot bitcoin is traded (and with which the SEC is engaged in litigation alleging that Coinbase operates as an unregistered national securities exchange). In Footnote 41 of its approval order, the SEC noted that the latest amended proposals by the exchanges did not include reference to those agreements (although it does not opine on why that is the case).
The spot bitcoin ETPs were approved by a 3-2 SEC vote with Chair Gary Gensler, Commissioner Hester Peirce, and Commissioner Mark Uyeda voting for, and Commissioners Caroline Crenshaw and Jaime Lizárraga voting against. The approval came on an accelerated basis under Section 19(b)(2)(C)(iii) of the Exchange Act, which permits a proposed rule change to take place earlier than 30 days after publication of a notice for good cause.
The issuers of the eleven ETPS approved by the Commission were Grayscale Investments, LLC, Bitwise Investment Advisers, LLC, Hashdex Asset Management, Ltd., iShares Delaware Trust Sponsor LLC, Valkyrie Digital Assets, LLC, 21Shares US LLC, Invesco Capital Management LLC, Van Eck Digital Assets, LLC, WisdomTree Digital Commodity Services, LLC, FD Funds Management LLC and Franklin Holdings, LLC.
The exchanges on which such ETPs will trade include NYSE Arca, Inc., The Nasdaq Stock Market LLC, and Cboe BZX Exchange, Inc.
This is a landmark decision for cryptocurrency markets that comes just over 15 years from when the Bitcoin network initially launched on January 3, 2009, and over 10 years since the first spot bitcoin ETP proposal on July 3, 2013.
Along with the approval order have come statements by SEC Chair Gensler and Commissioners Crenshaw, Peirce, and Uyeda:
- Chair Gensler noted that in light of last year’s Grayscale decision, that approval is “the most sustainable path forward.” He made clear that the approval is “cabined to ETPs holding one non-security commodity, bitcoin,” and restated his position that the “vast majority of crypto assets are investment contracts and thus subject to the federal securities laws.”
- Commissioner Peirce did not mince words in her statement that the approval had not come soon enough and that the Commission “squandered a decade to do [its] job.” She stated that the approval “marks the end of an unnecessary, but consequential, saga” and restated that the long string of prior denials was “perplexing.”
- Commissioner Uyeda agreed with the approval but found the SEC’s reasoning concerning because he believed it continued to reflect an “arbitrary and capricious” application of the “significant market” test. He took issue with the SEC continuing to find that the CME bitcoin futures market was not a “significant market” for the purpose of the spot bitcoin ETP.
- Commissioner Crenshaw issued a statement dissenting from the approval because she disagreed with the SEC’s conclusion that the proposals include sufficient fraud and manipulation prevention. She noted such fraud and manipulation in the spot bitcoin markets is widespread, including “pervasive” wash trading, concentrated ownership by few holders, and a lack of oversight. She further disagreed with the SEC and the DC Circuit that bitcoin futures and spot ETPs are “like products.”
There may be additional approvals of bitcoin-based spot cryptocurrency ETPs on the horizon.
See the SEC’s order
Chair Gensler’s statement
Commissioner Crenshaw’s statement
Commissioner Peirce’s statement
Commissioner Uyeda’s statement