“While today we approve the listing and trading of certain bitcoin ETP spot shares, we do not approve or endorse Bitcoin…. Investors should be cautious of the myriad risks associated with Bitcoin and products whose value is tied to cryptocurrencies.”—SEC Chairman Gary Gensler
Despite Mr. Gensler's warning, he, along with two other commissioners, voted last week to approve 11 exchange-traded funds (ETFs) containing Bitcoin for the first time since the cryptocurrency's inception. Starting January 10, 2024, US stock exchanges will be able to list Bitcoin ETFs for trading. Cryptocurrency enthusiasts hope this decision signals broader adoption of cryptocurrencies in the United States. Perhaps so, but the celebration may be premature: the decision will almost certainly mean greater regulatory scrutiny in this space.
An ETF is a type of investment fund that holds assets (such as stocks, bonds, or commodities) that are traded on stock exchanges. Previously, for large sectors of American investors, investing in cryptocurrencies was not so simple. Today, these investments are available on Nasdaq, CboeBZX Exchange, and NYSE Arca. This offers the introduction of Bitcoin shares into mainstream investment plans and creates a new bridge between Bitcoin and centralized finance (CeFi).
The SEC's decision to approve these ETFs was lukewarm and followed a lost court battle, which largely forced the SEC's hand. In August 2023, the SEC lost a DC Circuit appeal with Grayscale Investments over whether the SEC needed to reevaluate its decision to reject Grayscale Bitcoin Trust's (GBTC) latest application to become an ETF. In the announcement, Chairman Gensler made it clear that the SEC “did not approve or endorse Bitcoin,” but that ETF approvals were “the most sustainable path forward” after its court defeat.
GBTC's path to ETF conversion has been difficult. Founded in 2013, GBTC operated as a trust and offered its investors Bitcoin shares exclusively. GBTC is currently valued at almost $29 billion. GBTC shareholders don't actually own Bitcoin: they own shares of a trust that has access to Bitcoin. While GBTC slowly gained regulatory approval over the past decade, the lack of classification as an ETF had significant drawbacks in stabilizing GBTC's price. The new GBTC shares were restricted to between six and 12 months from the date of purchase, meaning they could not be sold regardless of their value, whether the shares were trading at a premium or discount. After the holding period, the shares were no longer restricted and holders were able to resell them in the public over-the-counter (OTC) market. Additionally, the SEC did not allow investors to redeem GBTC shares directly from Grayscale Investments, forcing investors who wanted to dispose of their GBTC shares to sell them to another investor. This greatly hampered GBTC's ability to track the price of Bitcoin, as investors would often be forced to sell their shares at discounts to other investors. Now that GBTC is an ETF, the redemption ban and holding periods are gone. The day after GBTC's ETF conversion, it was listed on the NYSE Arca.
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The SEC's reluctance to approve GBTC and other ETFs should alert the market to possible heightened regulatory scrutiny in the future. The SEC narrowly granted these approvals following a 3-2 vote by commissioners. While Gensler supported the approval, he warned that "investors should be cautious about the myriad risks associated with Bitcoin and products whose value is tied to cryptocurrencies." It further warned that these approvals were limited to ETPs holding Bitcoin and "in no way indicate the Commission's willingness to approve listing standards for cryptoasset securities" or "anything about the Commission's views on the status of other cryptoassets." under the federal securities laws." …” Commissioner Caroline Crenshaw had even harsher words about the decision: “the fraud and manipulation that impacts the price of spot Bitcoin surely impacts the price of spot Bitcoin held on ETPs.” She went on to say that “our investor protection research necessarily begins with Bitcoin spot markets. Are those markets safe? “There is substantial evidence that the answer is no.”
The reluctance of the SEC commissioners warns of the SEC's continued effort to control, through regulation, the cryptocurrency industry to a large extent, and this change will surely be followed by an increase in regulatory actions involving related fraud. with cryptocurrencies, market manipulation and lack of compliance. existing requirements, particularly now that ETFs offer a larger group of American investors an additional option for their 401(k) and investment accounts.
Grayscale may have written the playbook for crypto ETFs, but now they, along with others, will have more rules to follow. While a new group of investors gained access to GBTC, GBTC must now comply with a number of new regulations and requirements, including strict listing criteria, continuous monitoring of trading activity, and regular financial reporting.
If cryptocurrency investment companies and exchanges have any chance of surviving the coming regulatory onslaught, they must heed the lessons of the past as they prepare for the future. Compliance should be at the top of that preparation list. Creating, implementing and documenting strong compliance programs today is critical to your survival tomorrow.
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