Bitcoin “Spot” ETF
As the future of cryptocurrency in the United States continues to unfold, one of the most eagerly-anticipated developments has been the approval of a Bitcoin “Spot” Exchange-Traded Fund (ETF). This milestone has the potential to reshape the cryptocurrency market and bring new opportunities and challenges to investors, regulators, and the legal community alike.
The journey towards approving the Bitcoin Spot ETF has been a lengthy one, marked by regulatory scrutiny, concerns over market manipulation, and the desire for investor protection. At the forefront of the resistance campaign was none other than the United States Securities and Exchange Commission (SEC), the entity responsible for reviewing and approving such applications.
Despite approving traditional ETFs for bitcoin, in which bitcoin futures contracts are the underlying asset, the SEC insisted on rejecting Bitcoin Spot ETFs, or ETFs where actual bitcoins themselves are the underlying asset. One of the primary reasons for the SEC’s caution was the need to ensure that the Bitcoin market was sufficiently mature, liquid, and resistant to manipulation.
As the cryptocurrency market continued to evolve and mature, however, and the judicial branch checked the balance of power in the legislature, the SEC’s rejection of Grayscale’s application was deemed “arbitrary and capricious,” and the SEC was forced to reconsider its position. See Grayscale Investments, LLC v. SEC, No. 22-1142, 82 F.4th 1239 (D.C. Cir. 2023) and DC Circuit Court of Appeals Chastises SEC for Grayscale Denial.
Finding its hands tied, on January 10, 2024, the SEC finally approved 11 applications for U.S.-listed Bitcoin Spot ETFs, from companies such as Grayscale, BlackRock, Fidelity, Invesco, and others, paving the way for an influx of capital from institutional investors.
The SEC Reacts
In a statement released by the SEC, however, Chair Gary Gensler made clear that the SEC was not endorsing bitcoin, or any other crypto asset, and emphasized the Commission’s allegiance to fighting fraud and manipulation. Gensler was explicit: “the Commission will fully investigate any fraud or manipulation in the securities markets, including schemes that use social media platforms.”
Gensler then focused on the responsibility sponsors of bitcoin ETPs bear in ensuring market integrity, explaining that they are “required to provide full, fair, and truthful disclosure about the products…in public registration statements and required periodic filings.”
Gensler also warned that the SEC “will monitor [regulated exchanges] closely” to check that they are establishing and enforcing rules designed to prevent fraud and manipulation, including those originating from within and creating conflicts of interests.
Finally, “existing rules and standards of conduct will apply to the purchase and sale of the approved ETPs,” including anti-money laundering (AML) and know-your-customer (KYC) requirements and “Regulation Best Interest when broker-dealers recommend ETPs to retail investors, as well as a fiduciary duty under the Investment Advisers Act for investment advisers.”
The approval of a Bitcoin ETF represents a significant breakthrough in the cryptocurrency industry. As attorneys focused on digital assets, staying informed about the evolving regulatory landscape and providing legal guidance to clients interested in Bitcoin ETFs will be essential. This development is poised to bring new opportunities and challenges to the financial and legal sectors, and it’s crucial to be prepared for the changes it may bring.
Fill out our contact form here to set up a free 30-minute consultation, and read up on whether you need a crypto lawyer.