U.S. SEC’s statement approving spot Bitcoin exchange-traded products (original text)

Source: SEC; Compiled by: Songxue, Golden Finance

Today, the Commission approved the listing and trading of some spot Bitcoin exchange-traded products (ETPs).

I often say that the Commission acts within the law and how the courts interpret the law. From 2018, when Chairman Jay Clayton led the SEC, to March 2023, the Commission rejected more than 20 trading rule filings for spot Bitcoin ETPs. One of the filings, by Grayscale, considers converting the Grayscale Bitcoin Trust into an ETP.

We are now faced with a new set of applications similar to those we have declined to approve in the past. However, things have changed. The U.S. Court of Appeals for the District of Columbia held that the Commission failed to adequately explain its reasons for not approving Grayscale’s proposed listing and trading of the ETP. [1] Accordingly, the Court quashed that consideration and remanded the matter back to the Commission for reconsideration. Based on these circumstances and those more fully discussed in the Approval Order, I believe the most sustainable path forward is to approve the listing and trading of these spot Bitcoin ETP products.

The Commission evaluates any rule submitted by a national securities exchange for compliance with the Exchange Act and its provisions, including whether it is designed to protect investors and the public interest. The committee is neutral and does not express an opinion on specific companies, investments or underlying assets of ETPs. If an issuer of securities and the exchange on which it is listed comply with the Securities Act, the Exchange Act, and the Commission's rules, the issuer must be provided with the same access to our regulated markets as any other person.

Importantly, Today’s Commission action is limited to ETPs holding Bitcoin, a non-security commodity. It should in no way indicate that the Commission is willing to approve listing standards for crypto-asset securities. The approval also does not indicate the Commission’s view on the status of other crypto-assets under federal securities laws or the current status of non-compliance with federal securities laws by certain crypto-asset market participants. As I have said in the past, Without prejudging any crypto asset, the vast majority of Most cryptoassets are investment contracts and, as such, are subject to federal securities laws. [2]

Today’s investors can already trade at many brokerage firms, through mutual funds, national stock exchanges, peer-to-peer payment apps, non-compliant crypto trading platforms Buy, sell or otherwise gain exposure to Bitcoin, of course, through the Grayscale Bitcoin Trust. Today’s action will include certain protections for investors:

First, Sponsors of the Bitcoin ETP will Required to provide full, fair and truthful disclosures about products. Investors in any listed and traded Bitcoin ETP will benefit from the disclosures in the public registration statement and required periodic filings. While these disclosures are necessary, it is important to note that today’s action does not endorse the disclosed ETP arrangements, such as custody arrangements.

Secondly, the products will be listed and traded on the national stock exchange where they are registered. Such regulated exchanges must have rules designed to prevent fraud and manipulation, and we will monitor them closely to ensure they enforce these rules. In addition, the Commission will comprehensively investigate any fraud or manipulation in securities markets, including schemes to use social media platforms. [3] Such regulated exchanges also have rules designed to address certain conflicts of interest and protect investors and the public interest.

In addition, Existing rules and standards of conduct will apply to the purchase and sale of approved ETPs. This includes, for example, the regulation of best interests when broker-dealers recommend ETPs to retail investors, as well as the fiduciary duties imposed on investment advisers under the Investment Advisers Act. Today’s action does not approve or endorse cryptocurrency trading platforms or intermediaries, which are largely inconsistent with federal securities laws and often present conflicts of interest.

Third, China Securities Regulatory Commission staff are completing the registration statement review of 10 spot Bitcoin ETPs at the same time. This will help create a level playing field for issuers, promote fairness and competition, and benefit investors and the wider market.

The agency has extensive experience regulating physical non-security commodity ETPs, such as those that hold certain precious metals, since 2004. This experience has been extremely valuable in our oversight of Bitcoin ETP spot trading.

Although we are neutral, I would point out that the underlying assets in metal ETPs have consumer and industrial uses, whereas Bitcoin, by comparison, is primarily a speculative, volatile Assets are also used in illegal activities, including ransomware,[4] money laundering,[5] sanctions evasion,[6] and terrorist financing. [7]

While we have approved the listing and trading of certain spot Bitcoin ETP products today, we Bitcoin is not approved or endorsed. Investors should remain cautious about the numerous risks associated with Bitcoin and products whose value is tied to the cryptocurrency. [8]

[1] See Grayscale Investments, LLC v. SEC, No. 22-1142, 82 F.4th 1239 (D.C. Cir. 2023).

[2] The court also found that certain crypto-assets were offered as investment contracts and for sale. See, for example, SEC v. Terraform Labs Pte. Ltd., No. 23-cv-1346, 2023 WL 8944860 (S.D.N.Y. Dec. 28, 2023); SEC v. Blockvest, LLC, No. 18-cv-2287, 2019 WL 625163, Address *4-*9 (S.D. California, February 14, 2019); SEC v. Nat. Diamond Stock Co., 19-cv-80633, 2019 WL 13277296, Addresses *8-*10 (S.D. Fla. May 28, 2019); SEC v. Telegram Group. Inc., 448 F. Supp. 3d 352, 368-79 (S.D.N.Y. 2020), appeal denied, No. 20-1076, 2020 WL 3467671 (2d Cir. May 22, 2020); SEC v. Kik Interactive Inc., 492 F. Supp. 3d 169, 177-80 (New York, NY 2020); SEC v. NAC Found., LLC, 512 F. Supp. 3d 988, 995-97 (N.D. Cal. 2021); SEC v. LBRY, Inc., 639 F. Supp. 3d 211, 216-21 (D.N.H. 2022), Appeal Denied, No. 23-1743 (1st Cir. Oct. 23, 2023); SEC v. Terraform Labs Pte. Ltd., No. 23-cv-1346, 2023 WL 4858299 , Addresses *10-*15 (New York, NY, July 31, 2023).

[3] See SEC v. Constantin, Civil Case No. 22. 4306 (S.D. Texas).

[4] See U.S. Senate Committee on Homeland Security and Governmental Affairs, “In The Use of Cryptocurrencies in Ransomware Attacks, Accessible Data, and National Security Concerns” (May 24, 2022), available at https://www.hsgac.senate.gov/wp-content/uploads/imo/media/doc/ HSGAC%20Majority%20Cryptocurrency%20Ransomware%20Report_Executive%20Summary.pdf.

[5] See Basel Governance Institute, “Quick Guide 1: Encryption Currency and Money Laundering Investigations” (August 2023), available at https://baselgovernance.org/publications/quick-guide-1-cryptocurrencies-and-money-laundering-investigations. See also Chainalysis, “Cryptocurrency Money Laundering: Four exchange deposit addresses received over $1 billion in illicit funds in 2022” (January 26, 2023), available at https://www.chainalysis.com/blog /crypto-money-laundering-2022/.

[6] See Center for Strategic and International Studies, “Cryptocurrencies and U.S. Sanctions Evasion: Implications for Russia” (December 20, 2022), available at: https://www.csis.org/analysis/cryptocurrencies-and-us-sanctions-evasion-implications-russia. See also UK Finance, “Cyber-crypto-sanctions nexus” (4 February 2020), available at https://www.ukfinance.org.uk/news-and-insight/blogs/cyber-crypto-sanctions- nexus.

[7] See Congressional Research Service, “Terrorist Financing: Hamas and Cryptocurrency Fundraising” (November 27, 2023), available at https://crsreports.congress.gov/product/pdf/IF/IF12537; U.S. Department of the Treasury, “Following Terrorist Attacks on Israel, Treasury Sanctions Ha Activists and Financial Services Providers” (October 18, 2023), available at https://home.treasury.gov/news/press-releases/jy1816; RAND Corporation, “Terrorist Use of Cryptocurrencies: Technology and Organizational Barriers and Future Threats” (2019), available at https://www.rand.org/pubs/research_reports/RR3026.html.

[8] For example, see SEC Investor Education and Outreach Office, “Be Cautious About Cryptoasset Securities: Investor Alert” (March 23, 2023), available at https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins /investor-bulletins/crypto-asset-securities.