Omar Marques/SOPA Images/Sipa USA via AP
The Securities and Exchange Commission, which has done a decent job of protecting the public from cryptocurrency scams, is on the verge of making a disastrous decision to allow financial companies to offer the equivalent of exchange-traded funds comprised of Bitcoins.
The sponsors include BlackRock, Fidelity, and 11 other firms.
In anticipation of a favorable SEC ruling, the price of Bitcoin, which had languished around $25,000 as recently as last September, has been bid up to over $45,000. The financial press has reported that BlackRock alone has at least $2 billion lined up for this play and that the first-quarter trading volume could be $40 billion. With crypto mercifully dying of its own weight, the SEC could throw it a lifeline.
SEC Chair Gary Gensler, who once taught a course on crypto at MIT, has long warned that creations like Bitcoin, backed by nothing other than speculative expectations of investors, are dubious investments lacking the safeguards that the securities laws impose on stocks and bonds. Exchange-traded funds made up of Bitcoins operate at one further remove from scrutiny. The main beneficiaries are the financial companies that propose to offer them.
So why is Gensler’s SEC on the verge of granting approval? One reason is the immense political pressure from Wall Street on Gensler and the other two Democratic SEC commissioners. Another is a misreading of a court case that is alarming SEC lawyers.
In its August 2023 decision in a suit brought by Grayscale Investments, a financial company, the D.C. Circuit asked the SEC to justify its decision to allow a financial company to offer an exchange-traded crypto product based on futures markets, but not on spot markets. This opened the floodgates to other applications to create exchange-traded funds for spot crypto.
The short answer to the court’s question is that futures markets have their own regulatory schema, while exchange-traded products in the crypto spot market would be essentially unregulated. But some of the SEC legal staff have concluded based on the Grayscale ruling that if the SEC banned exchange-traded products for the spot market, they could be overruled in court. This concern is said to be spooking Gensler.
However, as Dennis Kelleher, who heads the watchdog group Better Markets, wrote in a comment letter to the SEC, the Grayscale ruling “just means that the Commission must more clearly explain why it would deny a spot bitcoin ETP while previously approving bitcoin futures ETPs.” Or as former SEC official John Reed Stark put it more pithily, “The difference between buying a bitcoin futures ETF and a bitcoin spot ETF, is like the difference between buying a lottery ticket from the State of New Jersey and buying a lottery ticket from Tony Soprano.”
Kelleher added, “The SEC must not facilitate the financial carnage that will follow if the crypto industry is allowed to repackage, add a veneer of legitimacy to, and widely disseminate a financial product that is little more than a socially worthless gambling chip.”
Amen. The SEC has until Wednesday to act.
