Week In Crypto: Bitcoiners Celebrate SEC Approval For Spot ETFs

The crypto industry is triumphant following a major U-turn on spot Bitcoin exchange-traded funds (ETFs) by the US securities regulator, though critics have strongly opposed the move.

The Securities and Exchange Commission (SEC) has given its approval for the launch of 11 spot Bitcoin ETFs, marking a dramatic climb down from its position only six months ago.

On Wednesday (January 10), SEC chair Gary Gensler announced the decision following a vote by the five-member commission.

Gensler was among the four commissioners who voted for the approval, while only one, fellow Democrat Caroline Crenshaw, voted against it.

Since 2018, Gensler noted that the SEC had previously rejected more than 20 applications to launch spot Bitcoin ETFs.

A spot Bitcoin ETF will allow investors to buy shares in a spot Bitcoin fund. The Bitcoin that backs the fund will be held by a third-party custodian, and the fund will be operated by an asset manager and listed on a registered US stock exchange.

One of the last major attempts to secure SEC approval for a spot Bitcoin ETF was from Grayscale, the world’s largest crypto-asset manager, in June 2022.

Grayscale had sought approval to convert its Grayscale Bitcoin Trust into an ETF, but the SEC rejected the application due to the risk of fraud and market manipulation.

This week, Gensler said he remains concerned about these risks, but he also said that his position had been swayed by a US Court of Appeals for the District of Columbia (DC).

Following an appeal from Grayscale, the court held that the SEC had failed to adequately explain its reasoning for rejecting Grayscale’s proposed ETF.

The court, therefore, vacated the SEC’s order against Grayscale and remanded the matter back to the commission.

“Based on these circumstances, I feel the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares,” said Gensler, referring to the broader category of exchange-traded products (ETPs).

Crypto still no safe place for investors

Although the SEC sees Bitcoin as a commodity due its perceived decentralisation, Gensler reminded investors that the “vast majority” of crypto-assets are “investment contracts”.

As such, these crypto-assets are securities and are therefore subject to securities laws — laws that Gensler said the crypto industry continues to violate.

“Today’s action does not approve or endorse crypto trading platforms or intermediaries, which, for the most part, are non-compliant with federal securities laws and often have conflicts of interest,” he said.

“It should in no way signal the commission’s willingness to approve listing standards for crypto-asset securities.”

Despite Gensler’s warning against non-compliant crypto exchanges, eight out of the 11 ETFs approved by the SEC have listed Coinbase as their custodian.

As covered by Vixio, the SEC is currently suing Coinbase on charges of operating an unregistered securities exchange and offering and selling unregistered securities.

Finally, Gensler reiterated his view that Bitcoin is “primarily” a speculative asset and provided evidence that it is used for ransomware, money laundering, sanctions evasion and terrorist financing.

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

Strong views among those for and against

For the crypto industry, the SEC’s decision is a major victory. Coinbase welcomed the verdict as a “momentous” occasion and a “watershed moment” for the crypto-economy.

“Spot bitcoin ETFs introduced by the world’s largest asset managers will unlock diversified pools of new investors to spur long-term growth and product innovation,” the company said.

“Not only will these ETFs give investors access to spot crypto in a familiar, regulated product — they will also usher in a new wave of crypto adoption.”

When an investor purchases shares in a spot Bitcoin ETF, market makers will need to transact in the underlying asset, increasing liquidity throughout the spot Bitcoin markets.

However, investors will not be able to withdraw their Bitcoin from the ETF. All the approved ETFs will follow a “cash creates” redemptions model, meaning that investors who wish to exit the ETF must sell their shares for cash.

Max Solomons, associate at Cassels Brock & Blackwell, predicted that this would be the main compromise that the crypto industry had to accept to win over the SEC.

Ahead of the decision, Solomons told Vixio that the SEC had ordered all applicants to amend their applications to “crash creates” redemptions — a clue of what was to follow.

Has the SEC gone soft on crypto?

Among crypto sceptics, the SEC’s decision is seen as a capitulation to an industry that now has a proven track record of fraud, market manipulation and other financial crimes.

Dennis Kelleher, co-founder and CEO of Better Markets, said the SEC’s decision has “rescued” the crypto industry from its run of criminal convictions and has given “false comfort” to investors.

“Bitcoin and crypto are worse than the chips you can buy at a casino because at least the casino is regulated,” he said.

“The spot Bitcoin market is not regulated, and that’s what the ETF is going to be pricing. There will be no SEC regulation or policing of Bitcoin.”

Kelleher said the SEC’s decision was not required or supported by the facts or law, adding that the SEC’s initial reason for rejecting the Grayscale application was legally sound.

In its initial response to Grayscale, the SEC included evidence that up to 95 percent of Bitcoin trading on unregulated exchanges is due to wash trading.

Better Markets, likewise, has provided evidence that up to 77 percent of all crypto trading volume on unregulated exchanges is due to wash trading.

“This approval of a Bitcoin ETF is an historic mistake that will not only unleash crypto predators on tens of millions of investors and retirees, but will also likely undermine financial stability,” said Kelleher.

“It will be interpreted and spun as a de facto SEC endorsement of crypto generally.”

Hilary Allen, professor of financial regulation at American University in Washington, DC, seconded Kelleher's comments.

“I was very disappointed to see the SEC approve exchange-traded Bitcoin products for retail investors,” she said

“Everyday investors will be harmed, crypto will be brought closer to the core of our financial system — and for what?

“Bitcoin and other crypto are at best a means of gambling. They will never be able to deliver on promises of financial inclusion, efficiency, decentralisation and privacy.”