Graeme Sloan/Sipa USA via AP Images
SEC Chair Gary Gensler testifies during a House Financial Services Committee oversight hearing, at the Capitol in Washington, September 27, 2023.
Thanks to SEC Chair Gary Gensler, Bitcoin, a speculative creation backed by nothing at all, has been brought back from the near dead. In November 2021, at the height of crypto fever, Bitcoins reached a peak value of $64,400. Then, after various crypto scandals, the value of a Bitcoin plummeted to below $35,000 for most of 2023. Today, Bitcoin is back trading at more than $63,000, near its all-time peak.
In January, in a 3-2 vote, Gensler sided with the SEC’s two Republican commissioners to allow 11 large financial firms to offer “exchange-traded products” (ETPs), which are tradable funds backed by Bitcoins. For a Democratic chair to vote against his two Democratic colleagues and side with Republican commissioners is almost unprecedented.
These new funds add nothing of value. Any investor who wants to buy a Bitcoin can simply go out and buy one. But they do create the impression that Bitcoins are a safe investment, because the funds are sponsored by reputable firms like Fidelity, and tacitly blessed by the SEC.
Why did Gensler, a regulator who has spent much of his recent career as an MIT professor and then as SEC chair warning about crypto abuses, change course? The long and the short of it is that Gensler is overly afraid of getting overruled in court.
Last August, the Court of Appeals for the D.C. Circuit sided with the firm Grayscale, whose request to create a fund based on the spot value of Bitcoins had been turned down by the SEC. The court pointed out that the SEC has approved funds based on value of Bitcoins in futures markets, so why not in spot markets? The Commission had argued that the two markets were substantially different.
The court did not require the SEC to grant Grayscale’s request; it merely remanded the case to the SEC for further consideration. Gensler feared being overruled again.
In a blistering dissent from Gensler’s ruling granting the requests, one of the other Democratic commissioners, Caroline Crenshaw, reviewed all the ways that Bitcoin trading is marked by fraud and manipulation, and concluded: “I am concerned that these products will flood the markets and land squarely in the retirement accounts of U.S. households who can least afford to lose their savings to the fraud and manipulation … I am concerned that today’s actions will create the imprimatur of Commission approval and oversight of the underlying spot markets when really no such oversight exists.”
It would have been far better for the SEC to reject these applications, make clearer the distinction between these proposed products and others that it approved, and take its chances in court. At least, this would have slowed down the latest Bitcoin gold rush.
The January ruling opens the floodgates for other exchange-traded products proposed by several other investment companies, including ones backed by Ethereum, a crypto product with an even flakier record than Bitcoins. The SEC has until late May to rule on these applications.
Why did the biggest investment companies like BlackRock, which has been skeptical of creations like Bitcoin, reverse course and become supporters of Bitcoin-backed funds? The fees, of course. BlackRock’s fund has reached $10 billion in record time.
On March 6, the SEC also watered down its proposed regulations requiring publicly traded corporations to disclose material risks related to climate change. Once again, the concern was being overruled in court.
There is charming symmetry between the SEC’s cave-in on Bitcoin and on climate, since Bitcoin and other crypto “mining” uses massive server farms that consume energy for a totally spurious purpose. As for appeasing the courts, yesterday the Fifth Circuit Court of Appeals ruled that even the SEC’s weakened climate rules were excessive, and ordered a temporary stay.
Better to stick to your principles, keep fighting, and let the chips fall.
