Original author: Will Awang
After ten years of arduous approval of BTC ETFs, the road to approval finally ushered in the dawn of victory. At 4 a.m. on January 11, 2024, the U.S. Securities and Exchange Commission (SEC) approved 11 spot BTC ETFs at the same time, including: Bit wise , Grayscale, Hashdex , BlackRock , Valkyrie , Invesco, Ark , VanEck , WisdomTree , Fidelity and Franklin .
All of this should be attributed to Grayscale's victory. On August 29, 2023, a U.S. federal court ruling allowed Grayscale to win its lawsuit against the SEC’s refusal to apply for a spot BTC ETF. The move accelerates the process of applying for BTC ETFs from traditional financial giants such as Blackrock and Fidelity in the past few months.
This article will look at the SEC's change in attitude (actively identifying market manipulation risks) after Grayscale won the lawsuit from a legal regulatory perspective. Afterwards, through the logic of BTC ETF, and the subsequent SEC still considered other crypto assets to be securities, it prompted a cautious stance on market risks.
1. The court ruling asked the SEC to take the initiative to speed up the approval process.
The SEC’s previous reason for not approving BTC ETFs was concerns about market fraud and manipulation. All rejected ETF applications cited the securities law's rationale of "protecting investors from market fraud and manipulation" (the products were not designed to prevent fraudulent and manipulative acts and practices).
The SEC allowed trading of futures BTC ETFs for the first time in 2021 and said: Futures products are more difficult to manipulate because the market is based on futures prices from the Chicago Mercantile Exchange (CME), which is regulated by the U.S. Commodity Futures Trading Commission (CFTC). CFTC) regulation.
In the case, Grayscale stated that the logic for approval of futures BTC ETFs should be equal to the logic for approval of spot BTC ETFs, otherwise all applications for futures BTC ETFs should be revoked. The judge agreed, finding that the SEC's rejection of Grayscale's application was acting a.bit rarily and capriciously because the SEC failed to explain how it treated similar ETF products differently. The court held that this administrative act of differential treatment violated administrative law, agreed to Grayscale's request and reversed the SEC's rejection of the application.
It was not until the Grayscale case that the SEC's attitude completely changed, from passive disapproval to active review, and stated in the 22-page approval document: This order approves the Proposals on an accelerated basis.
2. What does the SEC tell us about the risks of BTC ETF?
ETF itself has no legal obstacles as a long-standing compliant financial product, and BTC is also the only asset defined as a "non-security" by US regulations (especially the SEC). So what are the risks of BTC ETF?
In the 22-page approval document, the SEC told us: The risk comes from the uncontrollability of the ETF’s underlying asset trading market—that is, the risk of manipulation in the BTC spot market.
Although each ETF has signed a Surveillance Sharing Agreement with a compliance regulatory exchange (such as CME) to monitor the risks of the BTC futures market, the BTC spot itself is not traded on CME, and monitoring cannot cover the BTC spot market.
BTC futures are already compliant products on CME. Therefore, proving the price correlation between BTC spot and BTC futures in CME is the best option. As a result, the SEC compared the correlation between BTC prices and CME futures prices on the two crypto exchageCoinbase and Kraken since 2021 and found that the two are highly correlated. This means that if fraud or manipulation occurs in the BTC spot market, these behaviors are likely to also affect the futures market and be detected by CME's monitoring system, so that supervision can enter to control risks.
3. Market manipulation in the BTC spot market
The market manipulation risk in the BTC spot market mainly comes from the transactions of market makers or market participants on CEX. If US supervision can cover the supervision of CEX, then the risk can be relatively controlled.
In this regard, the US regulatory approach is to cover the two crypto exchage Coinbase and Kraken through the implementation of regulatory compliance. At the same time, Binance , which has the largest trading volume, was "fixed-point blasted" and successfully settled in and controlled compliance.
4. Neutral SEC and cautious Gary Gensler
From there, the neutral SEC evaluates whether rules submitted by national securities exchanges comply with the Securities Exchange Act and its regulations, including whether they are designed to protect investors and the public interest. At 4 a.m. on January 11, 2024, the SEC simultaneously approved 11 spot BTC ETFs, including: Bitwise , Grayscale, Hashdex, BlackRock, Valkyrie, Invesco, Ark, VanEck, WisdomTree, Fidelity and Franklin.
(https://www.sec.gov/news/statement/gensler-statement-spot-bitcoin-011023)
More importantly, the SEC stated in its press release:
The SEC’s ETF approval this time is limited to ETFs holding one non-security commodity (BTC) (holding one non-security commodity, bitcoin). It should in no way indicate that the SEC is willing to approve listing standards for any other crypto asset securities. The approval also does not indicate the SEC’s view on the status of other crypto-assets under securities laws or the current status of non-compliance with securities laws by certain crypto-asset market participants.
As I have said in the past, the vast majority of cryptoassets are investment contracts and therefore subject to securities laws.
Although the SEC is neutral, I would point out that the underlying assets in precious metal ETFs have consumer and industrial uses, whereas BTC, in contrast, is primarily a speculative, volatile asset that is also used in numerous illegal activities , including ransomware, money laundering, sanctions evasion and terrorist financing.
While the SEC approved the listing and trading of the spot BTC ETF today, we have not approved or endorsed BTC. Investors should remain cautious about BTC and crypto-asset-related products.
5. Pressure on Coinabse - Characterizing crypto assets
Gary Gensler’s speech was very clear: BTC is not a security, and market risks can be controlled and approved. Other crypto assets are securities, which is another story and has nothing to do with whether the BTC ETF is approved or not.
This still goes back to the fact that Gary Gensler has so far avoided answering the question of "what crypto-assets are securities" head-on. This is an issue of SEC's regulatory compliance with the three largest exchanges, Kraken, Coinbase, and Binance. It is also a political game issue that the SEC requires the US judicial and legislative bodies to respond to.
Coinbase has always been a leader in fighting the SEC, and it is incumbent upon us to shoulder this burden. Judge Katherine Polk Failla previously directly called ETH a commodity (Crypto Commodities ) in the Uniswap case. Considering that the judge is also hearing the SEC v. Coinbase case, her response to whether crypto assets are "securities": "This situation is not decided by the court, but by Congress." This ultimate question is thrown to the United States. Legislative body - Congress.
However, this congressional legislative process will be very long, and the 2024 election year will be worth looking forward to.
6. GM BTC ETF
No matter how the SEC puts on a show, the passage of the BTC ETF is of great historical significance, allowing those of us with cryptopunk ideals/fantasies of getting rich overnight to be part of it, adding a strong splash of color to the rolling torrent of history.
As Wang Chuan said: "The significance of January 10, 2024 in the history of world currency, looking back in the future, may be comparable to August 13, 1971 (Nixon announced the decoupling from gold), January 18, 1871 ( Germany was unified and led European countries and the United States to join the gold standard system within a few years)."
