If the Securities Exchange Commission (SEC) has good evidence that the Bitcoin market poses a danger to the U.S. investor, why would they allow investors to access this market through every other conceivable avenue, including three recently approved Bitcoin futures ETFs?
In my opinion, U.S. cryptocurrency companies are over-regulated to the point where it has effectively stifled growth in the US market while spectacularly failing to allow investors to benefit from this new asset class or to effectively protect them from crypto Ponzi schemes, exchange hacks and rug pulls.
In denying a Bitcoin spot market ETF, the SEC looked to the requirements of the Exchange Act Section 6(b)(5) which is “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.” The SEC’s mission is to “protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation.”
The SEC’s stated reason for its most recent denial of a Bitcoin spot market ETF was that the market is too prone to abuse and that the fund sponsor failed “to demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient.”
Following the SEC’s denial, attorneys from Davis & Polk, representing Grayscale Investments, have argued in a letter to the SEC that the SEC’s decision to deny a spot market Bitcoin ETF appears to be “arbitrary and capricious” and is therefore a violation of Administrative Procedure Act (“APA”). In order for the SEC’s ruling to be compliant with the APA they must prove that there is a rational connection between the facts found and the agency’s decision. Unless the SEC can provide a rational reason for their approval of several futures contract ETF’s while denying spot price ETF’s, it seems likely that their decision could be overturned as “arbitrary and capricious”.
The SEC’s denial of a spot market ETF has done nothing to effectively protect investors. The ruling has confused investors and continued to restrict one investment vehicle for an asset that is incredibly volatile in the short term but also has rewarded investors with average returns of 200 percent per year over the last decade.
Consider the following facts as to why a BTC spot market EFT should be approved
- The SEC recently approved three BTC ETF’s based on future contract prices.
- The approved futures contract ETF’s are inherently more risky and costly to investors than spot market ETF’s because of the “Contango Effect” which is the disparity between the projected futures price of the underlying commodity and the actual price.
- Investors have broad access to Bitcoin spot markets through a variety of consumer applications such as Square, CashAPP, Robinhood, Coinbase and many other approved exchanges.
- In addition to the licensed and regulated exchanges that offer US investors exposure to the Bitcoin spot market the Grayscale Bitcoin Trust (GBTC) has been approved and offered to investors since 2015.
- Institutional adoption of Bitcoin and institutional custodial services are widely available and there are many examples of insurance companies, pensions, and various investor funds that have exposure to Bitcoin spot markets.
- With few exceptions, Bitcoin transactions can easily be tracked and bad actors identified by analyzing the Bitcoin ledger. There are a number of highly qualified vendors that provide this service to government agencies such as Chainalysis whose most recent annual report indicated that only 2.1% of all cryptocurrency transactions were tied to illicit financial transactions including crypto ransomware, darknet markets, etc.
- The SEC has allowed public companies to buy and sell Bitcoin as part of their corporate treasury management, most notably Tesla, Microstrategy and Marathon.
Failure to recognize that a new asset class will require a new regulatory approach appears to be the primary reason for the denial according to SEC Commissioner Hester Peirce who has been a vocal critic of the SEC’s denial of Bitcoin ETF’s and was quoted as saying that the reason for the denials is that “…Bitcoin markets don’t look like our regulated securities markets…” and “The thing that regulators are most comfortable with are markets that look like our own.”
A commonsense approach to effectively protecting U.S. consumers from bad actors while providing clear guidance to businesses and consumers is far overdue. Ideally, these regulations would be promulgated by a central regulatory body that works with the industry to develop comprehensive and understandable regulations that punish bad actors while facilitating growth.
David McCarville is a Director at Fennemore Craig, P.C. and is a member of the firm’s Blockchain and Cryptocurrency practice group. He also is an adjunct professor at ASU’s Sandra Day O’Connor College of Law teaching a Blockchain & Cryptocurrencies Law & Policy course.
