Coin of the realm

For a decade the Securities and Exchange Commission said no to a bitcoin fund, and then, on 10 January 2024, it said yes. Nothing about bitcoin had improved in the meantime. What changed was that a court had run out of patience.

The facts are simple. The commission approved the listing and trading of “a number of spot bitcoin exchange-traded product (ETP) shares”, with staff finishing its review of registration statements for 10 such products.^{1SEC (Chair Gary Gensler)Statement on the Approval of Spot Bitcoin Exchange-Traded Products10 Jan 2024} Spot funds hold the coin itself, rather than futures contracts on it. They trade on ordinary exchanges, so a retiree can now own bitcoin through the same brokerage account that holds her index fund, with no digital wallet and no password to lose.

The man who signed the order was not celebrating. Gary Gensler, the SEC’s chairman, called bitcoin “primarily a speculative, volatile asset” and listed ransomware, money laundering, sanction evasion and terrorist financing among its uses. He added: “we did not approve or endorse bitcoin.”^{1SEC (Chair Gary Gensler)Statement on the Approval of Spot Bitcoin Exchange-Traded Products10 Jan 2024} It is an unusual way to open a market. Think of a customs officer waving a cargo through while announcing that he would not touch it himself.

We think the approval is right anyway. The case for it is not that bitcoin is good. It is that a regulator’s job is to police the wrapper, not to pass judgment on the contents. The approval is, in the chairman’s words, “cabined to ETPs holding one non-security commodity, bitcoin”, and it rests on disclosure by sponsors and trading on regulated exchanges with anti-fraud and anti-manipulation rules.^{1SEC (Chair Gary Gensler)Statement on the Approval of Spot Bitcoin Exchange-Traded Products10 Jan 2024} Americans were already free to buy bitcoin, and many did, on offshore platforms and unregulated apps with worse safeguards than a listed fund. A cheaper, supervised door to the same asset makes the market safer, not riskier.

The way the SEC got here is less flattering. Hester Peirce, a Republican commissioner, wrote that the commission had “squandered a decade of opportunities”, that “the goalposts kept moving as the Commission slapped ‘DENIED’ on application after application”, and that “the only material change since we last denied a similar application was a judicial rebuke.”^{3SEC (Commissioner Hester Peirce)Statement on the approval of spot bitcoin ETPs10 Jan 2024} The rebuke was the August 2023 ruling in Grayscale v. SEC, in which the D.C. Circuit found that the commission had failed to explain why it treated similar products differently.^{3SEC (Commissioner Hester Peirce)Statement on the approval of spot bitcoin ETPs10 Jan 2024} The SEC had already allowed futures-based bitcoin funds. It could not say why a fund holding the coin was a different animal. A regulator that must be told by judges to be consistent has, to put it kindly, a communications problem.

The strongest objection comes from inside the commission. Caroline Crenshaw, the Democratic commissioner who dissented, argues that “spot bitcoin markets are subject to fraud and manipulation” and that, unlike futures, “there is no primary regulator for the bitcoin spot markets.” She calls the setting an “unregulated, fragmented, continuously traded, global free-for-all.”^{2SEC (Commissioner Caroline Crenshaw)Dissenting statement on the approval of spot bitcoin ETPs10 Jan 2024} She also fears the funds provide “the investments themselves access to new investors in order to prop up their price.”^{2SEC (Commissioner Caroline Crenshaw)Dissenting statement on the approval of spot bitcoin ETPs10 Jan 2024}

Much of this is fair. Wash trading and concentrated ownership are real, and the approval leans on the correlation between futures and spot prices, which Ms Crenshaw calls a questionable foundation.^{2SEC (Commissioner Caroline Crenshaw)Dissenting statement on the approval of spot bitcoin ETPs10 Jan 2024} Questions on custody and trading pauses remain open.^{2SEC (Commissioner Caroline Crenshaw)Dissenting statement on the approval of spot bitcoin ETPs10 Jan 2024} Investors may also assume that a listed fund carries protections it does not. Mr Gensler was careful to say that the approval gives no signal on custody arrangements, on other crypto assets or on trading platforms.^{1SEC (Chair Gary Gensler)Statement on the Approval of Spot Bitcoin Exchange-Traded Products10 Jan 2024}

But these are arguments for better supervision of the spot market, not for keeping the product off the shelf. Refusing the fund did not remove bitcoin’s risks; it left them offshore. A listed fund brings its sponsors under American disclosure and anti-fraud rules, and gives the commission a hook it did not have before. If the underlying market is rotten, the answer is to go after the rot, with whatever powers Congress is willing to grant, not to deny savers a regulated route to an asset they could already buy elsewhere.

There is a second lesson, for the SEC itself. Caution that cannot explain itself is just delay. Approving a product while disowning it satisfies nobody. The commission should say what it will do if a fund’s price is rigged, and say it before the first trade, not after.

Bitcoin has acquired a wrapper at the price of a court case. Acquiring a regulator is the harder part.