Is the SEC's way of regulating really protecting consumers?
a bitcoin exchange-traded fund proposed by Van Eck Associates Corporation that would have directly tracked bitcoin’s spot price movements. On March 1, 2021, Cboe BZX Exchange, Inc. filed with the SEC pursuant to Section 19 of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder, a proposed rule change to list and trade shares of the VanEck Bitcoin Trust under BZX Rule 14.
11, Commodity-Based Trust Shares. The proposed rule change was published for comment in the Federal Register on March 19, 2021. If approved, it would have become the first spot bitcoin ETF approved in the U.S. However, the proposed rule change was rejected by the SEC earlier this month, an unsurprising outcome even in light of the regulator greenlighting three futures-based ETFs, including one from Van Eck. In the rejection, the SEC said Cboe had not met its burden under the Exchange Act and the Commission’s Rules of Practice to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6, in particular, the requirement that the rules of a national securities exchange be “designed to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.” This justification has been repeatedly used by the regulator in past rejections, but in light of futures ETFs being allowed to trade, it now seemed contradictory to many.Hester Peirce, Commissioner SECGabor Gurbacs, Director, Digital Asset Strategy at VanEckAn ETF is an investment vehicle that tracks the performance of a particular asset or group of assets. ETFs allow investors to efficiently diversify their portfolios without directly owning the assets. This feature is especially relevant to cryptocurrency, where many more conservative investors worry about the risks and challenges that come with buying and holding assets such as bitcoin themselves. The first rule filing proposing to list an exchange-traded product tracking bitcoin in the U.S. was submitted by the cryptocurrency exchange Gemini, operated by brothers Tyler and Cameron Winklevoss, on June 30, 2016. This proposal was rejected by the Commission. The SEC’s reason for rejecting the Winklevoss ETF and more subsequent applications has been rooted in the Commission's concerns over fraud and manipulation in the bitcoin market. The SEC states on their website that the Commision “strives to promote a market environment that is worthy of the public’s trust and characterized by transparency and integrity” and its mission “is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.” But should the SEC be restrictive of a free market and is their way of regulating really protecting consumers? In an interview at a CryptoConnect Event in Miami two weeks ago, SEC Commissioner Hester Peirce described a different role of the SEC, saying “[f]rom my perspective, the SEC’s role is a disclosure role. To help people get the information they need to make decisions for themselves.” There are many other spot ETF applications still in front of the SEC, and they risk receiving the same fate unless the SEC’s concerns are mollified or some other legal argument can prevail. Approving a physical Bitcoin ETF would arguably offer better protections than what’s available on the markets today.”How Bitcoin Futures Products Made It Through There are some key differences between how futures and spot-based ETFs operate that are worth keeping in mind. First, while the bitcoin futures products needed final approval from the SEC, a lot of the leg work was done by one of its sister agencies, the Commodity Futures Trading Commission , which has a different remit than the SEC. Former CFTC Chairman Chris Giancarlo told me, “The SEC oversees people's retirements, and pensions, investments that go into retail investors’ savings. This is different from the CFTC’s focus on orderly and well-functioning markets, as the marketplaces overseen by the CFTC are primarily institutional, with not a lot of retail participation.” As a result, when it came to the launch of bitcoin futures, it was a matter of the exchanges certifying to the CFTC that in their judgment, bitcoin futures, as opposed to the underlying market, were not readily susceptible to manipulation. There was no requirement that there be a certification that the underlying spot markets were free of fraud and manipulation.” This doesn’t mean the CFTC has not scrutinized the cryptocurrency space, or stepped in when necessary. For instance, in September 2021, the CFTC announced 14 complaints against various crypto trading platforms. But the exchanges themselves have much more authority to approve new products than SEC-regulated counterparts. Still, when the SEC finally approved the first futures-based bitcoin ETFs in early October 2021, including ProShares Bitcoin Strategy ETF and the Valkyrie Bitcoin Strategy ETF, it likely did so relying on the CFTC’s satisfaction that the methodologies used by the CME were satisfactory to minimize the ability to readily manipulate the futures markets. It is also worth noting that Gary Gensler was formerly Chairman of the CFTC. Spot applicants are now stepping up the pressure on the SEC. On October 19, 2021, before the VanEck rejection, Grayscale Investments, the world’s largest digital currency asset manager,
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