Hester M. Peirce has always been an unswerving supporter of cryptocurrency among SEC commissioners. He is known as the "Crypto Mom" by the community, and voted in favor of the 3:2 ETF approval vote. She is a Republican who was appointed as SEC commissioner during the Trump era. The following is her statement on the passage of the Bitcoin spot ETF.
Today marks the end of an unnecessary but important drama. More than a decade after the first application for a spot Bitcoin exchange-traded product (“ETP”) was filed, the SEC has finally approved multiple applications submitted by exchanges to allow the listing and trading of spot Bitcoin ETPs.
If it weren't for the DC Circuit-ex-machina, the drama would likely have lasted for more than a decade. You don’t need to be an experienced securities attorney to notice that Bitcoin-related ETP applications are treated differently than many other ETP applications that have been routinely filed and approved over the past decade.
ETP is an important innovation. Through them, investors can conveniently take positions in securities and non-securities (such as precious metals). Even though the position can be taken directly elsewhere, the ETP structure offers its own advantages.
ETP shares are listed and traded on national securities exchanges, and their prices continually fluctuate with market prices, just like regular stocks. By creating and redeeming fund shares, institutional traders, known as authorized participants, help align the price of those shares with the prices of the assets in the portfolio. ETPs are accessible to investors and operate within the framework of federal securities laws.
One of the questions I’ve been asked most frequently since I became a commissioner six years ago is “When will the SEC approve a spot Bitcoin ETP?” The logic of the lengthy rejection is confusing for reasons I’ve explained before. It is impossible to predict the approval timeline for spot Bitcoin ETPs because the review process for these applications is very different from the process for approving comparable ETPs.
The standards keep changing as the SEC slaps a "deny" mark on one application after another.
Bitcoin derivatives have been around for a long time
Bitcoin derivatives have been traded under other regulatory regimes for years. For example, in 2017, CME Group and CBOE, both regulated by the Commodity Futures Trading Commission, listed Bitcoin futures. Foreign jurisdictions have long allowed spot Bitcoin ETP trading.
The SEC should have taken comfort from the successful launch and smooth trading of these products, even amid market tensions and volatility. However, to this day, the SEC remains steadfast in its reluctance to allow spot Bitcoin ETPs to enter the U.S. market.
Meanwhile, the SEC has forced retail investors to take Bitcoin positions in securities markets in less efficient ways. For example, retail investors could hold it through non-exchange-traded products or gain some position by buying companies or funds that own or mine Bitcoin.
And, in 2021, Bitcoin futures trading funds (ETFs) registered under the 1940 Act began trading because the SEC was unable to stop them. In 2022, the SEC approved the trading of Bitcoin futures ETPs registered under the 1933 Act.
These futures-based products are more complex and difficult to manage than spot products, which can result in higher costs for investors. In any case, the basis for letting these products trade should be equally strong as the basis for letting spot products trade: the high correlation between Bitcoin futures prices and spot prices means that regulated futures markets will be equally vulnerable to spot Bitcoin-based products. Important, just like for funds investing in Bitcoin futures.
But until the court reminded us that it “failed to meet the standard of reasonable decision-making in explaining an unwarranted disparagement of the obvious financial and mathematical relationship between the spot and futures markets,” we still rejected the spot Bitcoin ETP.
SEC’s unfair stance has delayed spot ETFs for years
Rather than admitting its error, the SEC offered a weak explanation for its change of position. In the past, the SEC has rejected applications due to our bias against the underlying asset, citing the still immaturity of the Bitcoin market and concerns of manipulation.
Today's approval order states that the SEC now believes it has demonstrated "prevention of fraud and manipulation" because prices in the CME Bitcoin futures market and the spot Bitcoin market have been highly correlated over the past two and a half years. During this time, we rejected multiple applications, depriving investors of the opportunity to obtain Bitcoin positions in a more convenient and investor-friendly way. The only substantive change from the last time we rejected a similar application was the court's rebuke.
We have wasted a decade of opportunity to fulfill our responsibilities. We could have approved these products years ago if we had applied the same standards we use for other commodity-based ETPs, but we refused to do so until the courts called our bluff. Even now, our approval is only grudging, as is our continued insistence that these products must meet relevance tests that we have not previously imposed on other commodity-based ETPs.
Perhaps the only upside is that now that we know the SEC is able to perform robust correlation analysis, perhaps the road to approval of other spot cryptocurrency ETPs will not be as bumpy as it is now (even if the SEC insists on continuing to apply a test that is not applied anywhere else) .
Spot ETF clearance has not eliminated the unfair treatment of cryptocurrencies
Today’s approval order does not undo the many harms caused by unfair treatment when dealing with spot Bitcoin products.
First, our arbitrary and sloppy handling of applications in this area will continue to damage our reputation beyond the crypto space. Reduced trust from the public will hamper our ability to regulate markets effectively. This drama will tarnish future interactions between the industry and our employees and will diminish the rich and informative conversations that best protect investors.
Second, our disproportionate focus on these applications has diverted limited staff resources away from other mission-critical work. Over a decade, millions of dollars in staff time may have been spent blocking these applications.
Third, our actions here confuse people's understanding of the SEC's role. Congress did not give us a mandate to tell people whether particular investments are right for them, but we abuse administrative procedures to prevent investments we don't like from being made available to the public.
Fourth, by failing to follow our normal standards and procedures for considering spot Bitcoin ETPs, we have created an artificial frenzy around them. If these products had been marketed in the usual way for other similar products, we could have avoided the circus atmosphere we find ourselves in now.
Fifth, we alienated a generation of product innovators in our field. Our unreasonable handling of these applications demonstrates that regulatory bias against new products and services may cause us to circumvent the law and unreasonably delay product launches. The industry has recorded hundreds of meetings, filed dossiers, withdrawn dossiers and made changes, and ultimately had to fight an expensive legal battle to get us to where we are today.
While this is a time for reflection, it is also a time for celebration. I’m not celebrating Bitcoin or Bitcoin-related products; what a regulatory agency thinks about Bitcoin is irrelevant.
I am celebrating the right of American investors to express their views on Bitcoin by buying and selling spot Bitcoin ETPs. I also celebrate the persistence of market participants in trying to launch products they think investors want. I commend the applicant for persevering in the face of SEC obstruction for ten years.
