The U.S. Securities and Exchange Commission (SEC) has approved proposals from three stock exchanges to list and trade shares of 11 spot bitcoin-based products (the “Spot BTC Approval”). Following the Spot BTC Approval, the SEC’s Division of Corporation Finance declared the registration statements for a number of these products to be effective, allowing the products to begin trading. Wilson Sonsini was part of the legal team for one of the spot bitcoin products approved.
The Spot BTC Approval marks the end of a long list of rejections of proposals to trade spot bitcoin products on national securities exchanges. Beginning in early 2017, the SEC had ruled that Section 6(b)(5) of Securities Exchange Act of 1934 (which requires, among other things, that a listing exchange’s rules be designed to “prevent fraudulent and manipulative acts and practices”) required the listing exchange to have a comprehensive surveillance sharing agreement with a regulated market of significant size for bitcoin. In its rejection orders, the SEC consistently concluded that bitcoin trading platforms were unregulated platforms and that surveillance agreements with such trading platforms therefore did not meet the requirements of Section 6(b)(5).
Despite its repeated rejections of exchange proposals to trade spot bitcoin products, the SEC did approve two proposals to list and trade bitcoin futures products. Following these approval orders, the sponsor of a spot bitcoin product, Grayscale, approached the D.C. Circuit alleging that the SEC failed to treat like cases alike by denying the listing of Grayscale’s proposed spot bitcoin product while approving the two bitcoin futures products. The D.C. Circuit agreed with Grayscale, noting the close price correlation between the spot and the futures markets, and ruled that the SEC had failed to show why bitcoin futures products should be treated more favorably than spot bitcoin products.
The Spot BTC Approval refers to the D.C. Circuit’s ruling and notes that each exchange has a surveillance sharing agreement with a futures exchange that trades bitcoin (i.e., the Chicago Mercantile Exchange). The Spot BTC Approval reviews a study put forward in one of the proposals to conclude that bitcoin spot and futures markets are sufficiently correlated so that surveilling the bitcoin futures market would allow exchanges to identify fraud or manipulation on the bitcoin spot markets.
SEC Commissioners Caroline Crenshaw and Jaime Lizárraga dissented from the Spot BTC Approval. Chair Gary Gensler, who voted to approve, issued a statement noting that while the bitcoin ETPs would include important protection for investors, the approval order “should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities.” Chair Gensler closed by noting that the Spot BTC Approval was not an endorsement or approval of crypto and that “investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
An open question in light of the Spot BTC Approval and the Chair’s statements is how the SEC may deal with the many pending proposals to list and trade spot Ethereum products. Several Ethereum futures ETFs began trading in October 2023, which may cause market participants to ask whether the SEC will be able to reject exchange proposals to trade spot Ethereum products, especially if a strong correlation between Ethereum futures and Ethereum spot markets can be established. Chair Gensler, however, has notably declined to express a view on whether Ethereum is a security, which may raise questions regarding the regulatory treatment of these products. Also notably, trading volumes for Ethereum futures are significantly smaller than volumes for bitcoin futures. Whether the SEC will consider these distinctions to be material remains to be seen—we are likely still months away from a decision on spot Ethereum products.
