SEC Order Approves Eleven Spot Bitcoin ETFs for Trading
By Robert A. Musiala Jr.
On January 10, the U.S. Securities and Exchange Commission (SEC) simultaneously approved eleven spot bitcoin Exchange Traded Funds (ETFs) on an accelerated basis based on its Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, to List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units (Release No. 34-99306) (Order). All eleven bitcoin ETFs launched trading the following day, on January 11.
According to the Order, “After careful review, the [SEC] finds that the [bitcoin ETF] Proposals are consistent with the Exchange Act and rules and regulations thereunder applicable to a national securities exchange.” Among other things, the Order finds that the bitcoin ETF proposals met certain requirements under the Securities and Exchange Act of 1934 for the listing exchange to maintain rules “designed to ‘prevent fraudulent and manipulative acts and practices’ and, ‘in general, to protect investors and the public interest’” and “to assure the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities.”
The Order finds that each exchange seeking to list a bitcoin ETF “has a comprehensive surveillance-sharing agreement with the CME via their common membership in the Intermarket Surveillance Group. This facilitates the sharing of information that is available to the CME through its surveillance of … the CME bitcoin futures market.” The Order goes on to state that the results of an SEC analysis “confirm that the CME bitcoin futures market has been consistently highly correlated with [a] subset of the spot bitcoin market throughout the past 2.5 years” which provides “empirical evidence supporting the … conclusion that prices generally move in close (although not perfect) alignment between the spot bitcoin market and the CME bitcoin futures market.” Based on these findings, the Order concludes that “because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the Exchanges’ comprehensive surveillance-sharing agreement with the CME … can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the [bitcoin ETF] Proposals.”
The Order further finds that each bitcoin ETF proposal “sets forth aspects of its proposed [Exchange Traded Product], including the availability of pricing information, transparency of portfolio holdings, and types of surveillance procedures, that are consistent with other spot commodity [Exchange Traded Products] that the [SEC] has approved.” Accordingly, the Order finds that the bitcoin ETF proposals “are reasonably designed to promote fair disclosure of information that may be necessary to price the shares of the Trusts appropriately, to prevent trading when a reasonable degree of transparency cannot be assured, to safeguard material nonpublic information relating to the Trusts’ portfolios, and to ensure fair and orderly markets for the shares of the Trusts.”
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Multiple SEC Commissioners Publish Statements on Bitcoin ETF Approval Order
By Robert A. Musiala Jr.
On January 10, following the publication of an order (Order) by the U.S. Securities and Exchange Commission (SEC) approving eleven spot bitcoin exchange traded funds (ETFs), multiple SEC commissioners published individual statements expressing their views on the Order. A statement by SEC Chair Gary Gensler noted that the SEC had previously disapproved more than 20 bitcoin ETF applications, but “[c]ircumstances, however, have changed” after “The U.S. Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasoning in disapproving the listing and trading” of a specific proposed ETF. According to Chair Gensler’s statement, “[b]ased on these circumstances … the most sustainable path forward is to approve the listing and trading of these spot bitcoin ETP shares.”
SEC Commissioner Hester M. Peirce published a statement noting, among other things, that the Order “marks the end of an unnecessary, but consequential, saga” in which the SEC “squandered a decade of opportunities to do our job.” According to the statement by Commissioner Peirce, “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.” Commissioner Peirce’s statement also provides a discussion of “the many harms created by the disparate treatment of spot bitcoin products.”
SEC Commissioner Mark T. Uyeda published a statement explaining, among other things, that while he “concur[s] with the approval of the spot bitcoin ETP applications” he has “strong concerns with three aspects of the order”: (1) The Order improperly attempts to validate the application of the “significant size” test to spot bitcoin ETPs that was struck down by judicial review; (2) The Order invents a novel, previously unarticulated standard to form the basis for approval; and (3) The Order disguises the SEC’s motivation for accelerating the approval of the applications, which is to prevent a first-mover advantage among spot bitcoin ETPs.
Finally, SEC Commissioner Caroline A. Crenshaw published a statement dissenting from the Order. According to the statement by Commissioner Crenshaw, the Order approving the bitcoin ETFs was “unsound and ahistorical” and “put us on a wayward path that could further sacrifice investor protection.” Commissioner Crenshaw’s statement provides an analysis finding that the global spot markets underlying the bitcoin ETPs are marred by fraud and manipulation, concentrated, and without adequate oversight. Among other things, Commissioner Crenshaw’s statement also critiques and disagrees with the recent decision by the U.S. Court of Appeals for the District of Columbia cited in the statement by Chair Gensler, and argues that the Order does not appropriately consider the broader public interest.
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CFTC Technology Advisory Committee Publishes DeFi Report
By Christopher Lamb
According to a recent press release by the Commodity Futures Trading Commission (CFTC), the CFTC’s Digital Assets and Blockchain Technology Subcommittee of the Technology Advisory Committee (TAC) recently released a report on Decentralized Finance (DeFi), at the recommendation of the Department of Treasury, to “conduct further engagement with industry to explain how relevant laws and regulations apply to DeFi services, and take additional regulatory actions and publish further guidance informed by this engagement.” According to the report, DeFi “presents promising opportunities and complex, significant risks to the U.S. financial system, consumers, and national security.” The report indicates that the majority of DeFi systems “are not completely decentralized or centralized, but instead fit on a multi-level spectrum of (de)centralization.” According to the press release, “a central concern related to DeFi systems is the lack of, and some industry designs to avoid, clear lines of responsibility and accountability.” The press release notes that this lack of responsibility and accountability complicates victim recourse, defense against illicit exploitation, and the implementation of necessary changes during crisis. The report provides detailed recommendations to mitigate risks in DeFi, including:
- Resource assessment, gathering data, and mapping of threats;
- Surveying the existing regulatory perimeter and whether frameworks should be expanded to address additional risks;
- Risk identification, assessment, and prioritization;
- Identifying and evaluating the range of potential policy responses to address risks; and
- Fostering greater engagement and collaboration with domestic and international standard setters, regulatory efforts, and DeFi builders.
Among other things, the report also recommends specific actions for anti-money laundering (AML) and digital identify in DeFi, including applying a holistic approach to regulate identity information, compliance, and verification across different layers of the DeFi ecosystem, and determining the level of identity information required for different financial actors.
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FINRA Adds Crypto Asset Section to Annual Regulatory Oversight Report
By Robert A. Musiala Jr.
On January 9, the Financial Industry Regulatory Authority (FINRA) published its 2024 FINRA Annual Regulatory Oversight Report. The report includes a new Crypto Asset Developments section that discusses various regulatory and compliance risks and challenges that FINRA member firms “seeking to engage in crypto asset-related activity should identify and address.” Among other things, the risks addressed by the new report section include “reviewing and evaluating their supervisory programs and controls, and compliance policies and procedures, in areas such as cybersecurity, AML compliance, communications with customers, manipulative trading, performing due diligence on crypto asset private placements and supervising their associated persons' involvement in crypto asset-related outside business activities (OBAs) and private securities transactions (PSTs)” The new report section also provides detail on “Surveillance Themes and Effective Practices” and provides links to related resources.
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Reports Provide Details on 2023 Crypto Scams
By Lauren Bass
According to a recent article by a self-styled “anti-scam solution” company, 2023 saw an uptick in cryptocurrency phishing scams. Using one scam in particular – a type of malware called “Wallet Drainers” that can be deployed on websites to trick users into signing fraudulent transactions – malicious actors reportedly stole $295 million in assets from approximately 324,000 victims during 2023.
In related news, according to a recent study released by a blockchain analytics company, North Korean hackers reportedly stole $600 million in cryptocurrency during 2023. Overall, malicious actors tied to the Democratic People’s Republic of Korea (DPRK) were reportedly responsible for almost 1/3 of all stolen crypto funds in 2023, and DPRK-linked hacks were “on average ten times as damaging as those not linked to North Korea.”
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