iBackground Information
As recently as one year ago, the SEC denied approval to list and trade similar ETPs — a decision that was subsequently vacated by the US Court of Appeals for the District of Columbia Circuit in Grayscale Investments, LLC v. SEC. In that decision, the appellate court concluded that the SEC had failed to adequately justify its denial of approval for spot bitcoin ETPs while granting approval for bitcoin futures ETPs.
Notably, while the SEC has now granted authorization for the trading of spot bitcoin and bitcoin futures ETPs, it has also emphasized that the decision is limited to ETPs holding bitcoin, which the SEC considers a non-security commodity. In contrast, the SEC has repeatedly telegraphed that it considers the vast majority of crypto assets (e.g., Ether, Solana, etc.) to be securities rather than commodities. Given the SEC’s delay on spot Bitcoin ETPs and its enforcement actions against crypto issuers and exchanges, it should be no surprise that the SEC delayed decisions on a number of spot Ether ETPs until this summer.
Exchange Act Considerations
Before listing a new product for trading, a securities exchange generally must file a rule change with the SEC. The SEC is required to approve the new rule if it “finds that such proposed rule change is consistent with the requirements” of the Exchange Act and any SEC regulations. Under the Exchange Act, the rules of an exchange must, among other things, be designed to prevent fraudulent and manipulative acts and practices, remove impediments to a free and open market, and protect investors and the public interest.
Prior to January 2024, the SEC denied approval for all spot Bitcoin ETPs on grounds that the products were not adequately designed to prevent fraudulent and manipulative acts and practices as required by the Exchange Act. In 2022, however, the SEC granted approval for two Bitcoin futures ETPs to be listed and traded on NYSE Arca and Nasdaq. It was this discrepancy in the SEC’s treatment of spot Bitcoin ETPs as compared to Bitcoin futures ETPs that set up the SEC’s latest decision.
In Grayscale, the SEC attempted to justify the differential treatment of these two classes of ETPs, but the appellate court found the SEC’s reasoning lacking, particularly given the close economic correlation between spot and futures products based on the same underlying commodity. Ultimately, the SEC moved off its position, concluding that doing so was the “most sustainable” path for the Commission to take.
Takeaways
As noted above, the SEC has stressed that, at least in the Commission’s view, this landmark decision should not be viewed as the SEC’s endorsement of Bitcoin, nor as an indication of how the SEC might treat ETPs based on other crypto assets, the vast majority of which the SEC considers securities rather than commodities. Investors, regardless of their sophistication, should continue to exercise caution when investing with bitcoin and/or products with value tied to cryptocurrency. That said, crypto optimists may see these approvals as a significant, if minor, sign that the SEC’s previously uncompromising posture toward crypto is beginning to soften.
