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Gensler Says His Hand Was Forced: SEC Commissioners Celebrate and Bemoan Bitcoin ETF Approval

Last Updated January 11, 2024 9:52 AM
Teuta Franjkovic
Last Updated January 11, 2024 9:52 AM

Key Takeaways

  • The SEC has approved spot Bitcoin ETFs, but not all commissioners were in favor of the decision.
  • The approval process for spot Bitcoin ETFs was controversial.
  • The term “ETF” is not always interchangeable with “ETP.”

The United States Securities and Exchange Commission’s (SEC) recent approval of a slate of spot Bitcoin exchange-traded funds (ETFs) has been met with a mix of reactions from the agency’s commissioners.

While three commissioners voted in favor of the approval, two others dissented.

SEC Approves Spot Bitcoin ETFs, But with Reservations

Chair Gary Gensler, Commissioner Hester Peirce, and Commissioner Mark Uyeda voted to approve the ETFs. However, both Peirce and Uyeda expressed concerns about the SEC’s process for approving the applications. Commissioner Caroline Crenshaw, on the other hand, issued a sharp dissent from the approval order.

The only commissioner who has not yet publicly commented on the approvals is Jaime Lizárraga who also voted against approval.

The SEC’s approval of the ETFs marks a significant step forward for the cryptocurrency industry. However, the commissioners’ comments highlight the ongoing debate about the regulation of digital assets.

Gensler Gives A Cautious Yes to Trading, Not to Bitcoin Itself

While SEC Chair Gary Gensler voted in favor of the spot Bitcoin ETF approvals, his statement reflected a critical stance on the market for such products. Gensler acknowledged  the decision as a sustainable path forward, yet he was explicit in his characterization of Bitcoin as a “speculative, volatile asset” involved in various illicit activities like ransomware, money laundering, and terrorist financing. He emphasized that the SEC’s approval of the ETFs does not equate to an endorsement of Bitcoin itself.

He said :

“While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin.”

These statements indicate deep-seated divisions within the SEC’s five-member leadership regarding the regulatory approach to spot Bitcoin ETFs and the broader oversight of the cryptocurrency space. Gensler’s tenure at the SEC has been marked by significant criticism from various sectors, including congressional members, the crypto industry and its advocates, and even from within the commission. This criticism underscores the ongoing debate and challenges faced in regulating the evolving crypto market.

Commissioners Critique Bitcoin ETF Approval Process

Commissioner Hester Peirce, in her statement , expressed a critical view of the SEC’s prolonged resistance to approving spot Bitcoin ETFs. Peirce highlighted that the agency’s longstanding refusal to greenlight these proposals has caused “many harms.”

She said :

“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.”

Commissioner Mark Uyeda, while voting in favor of the approval order for the spot Bitcoin ETFs, raised “strong concerns” about certain aspects of the approved products. Specifically, Uyeda pointed out  issues with the cash-redemption mechanism employed by these ETFs. He argued that this approach is less efficient compared to in-kind redemption methods used by other types of ETFs.

He wrote :

“The Approval Order is absent of any analysis as to how the cash-only creation and redemption feature helps to prevent, or perhaps promote, fraud. The removal of in-kind creations and redemptions — coupled with the fact that no other commodity-based ETP prohibits in-kind creations and redemptions — makes one wonder how the Commission reached its conclusion.”

‘ETPs – Not ETFs’

Commissioner  Crenshaw expressed  her dissent regarding the approval of the spot Bitcoin ETFs. Her concerns centered around issues of fraud and market manipulation within the Bitcoin market. She also voiced broader reservations about Bitcoin itself. Crenshaw’s stance critically addressed the nature of these approvals, reflecting her skepticism about the readiness of Bitcoin-related financial products for the mainstream market and the potential risks they might entail.

She said :

“I am concerned that there will be confusion about what exactly these products are – (they are not ETFs [exchange-traded funds] 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.”

SEC Approval Order Mentions ETFs

The SEC’s approval order  for the latest batch of crypto-related financial products has caused some confusion in terminology. The order includes products from firms like Bitwise, Hashdex, Ark Invest, Invesco Galaxy, and Franklin Templeton, referring to them as “ETFs” in their names. However, the text of the order predominantly describes these products as spot Bitcoin Exchange-Traded Products (ETPs).

This distinction is significant, as the terms ETF and ETP are not always interchangeable. According to the Financial Industry Regulatory Authority (Finra), an independent regulator for U.S. securities firms, ETFs fall under the broader category of ETPs, but there isn’t a universally accepted single definition for an exchange-traded product.

The implications of this distinction for investor safety and the responsibilities of asset managers remain unclear. It’s particularly relevant whether these firms are required to clearly differentiate between these terms in their public communications.

Notably, Grayscale referred to its offering as an ETF in a recent press release, while Coinbase, playing a custodial and surveillance-sharing role in various offerings, also used the term ETFs in a blog post to describe the newly approved products. This usage highlights the ongoing ambiguity and the need for clarity in the rapidly evolving cryptocurrency financial products sector.

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