Full statement from "Crypto Mom" SEC Commissioner Hester M. Peirce: ETF approval does not eliminate the unfair treatment of cryptocurrencies

Author: Hester M. Peirce, U.S. SEC Commissioner

Compiled by: Wu Says Blockchain

Note: Hester M. Peirce has been a steadfast supporter of cryptocurrency among SEC commissioners, known as the "crypto mom," and cast a vote in favor during the 3:2 ETF approval vote. She is a Republican and was appointed as an SEC commissioner during the Trump administration.

Today marks the end of an unnecessary yet significant drama. After more than a decade since the first application for a spot Bitcoin exchange-traded product ("ETP") was submitted, the SEC has finally approved multiple applications submitted by exchanges, allowing for the listing and trading of spot Bitcoin ETPs. If it weren't for the "manipulation god" of the Delaware Circuit Court, this drama could have lasted over ten years. You don't need to be an experienced securities lawyer to notice that Bitcoin-related ETP applications have been treated differently compared to many other ETP applications that have been routinely submitted and approved over the past decade.

ETPs are an important innovation. Through them, investors can conveniently gain exposure to both securities and non-securities (such as precious metals). Even when direct exposure can be obtained elsewhere, the ETP structure offers its own advantages. ETP shares are listed and traded on national securities exchanges, with prices fluctuating with market prices, just like ordinary stocks. By creating and redeeming fund shares, institutional traders known as authorized participants help keep the prices of these shares aligned with the prices of the assets in the portfolio. ETPs are accessible to investors and operate within the framework of federal securities laws.

Since I became a commissioner six years ago, one of the most frequently asked questions I receive is, "When will the SEC approve a spot Bitcoin ETP?" For reasons I have previously explained, the logic behind the prolonged rejections is perplexing. It is impossible to predict the timeline for the approval of a spot Bitcoin ETP, as the review process for these applications is markedly different from that for approving comparable ETPs. As the SEC stamped "rejected" on application after application, the standards kept changing.

Bitcoin derivatives have been traded under other regulatory regimes for many years. For example, in 2017, the Chicago Mercantile Exchange and the Chicago Board Options Exchange listed Bitcoin futures under the regulation of the Commodity Futures Trading Commission. Foreign jurisdictions have long allowed the trading of spot Bitcoin ETPs. The SEC should have taken comfort from the successful launch and smooth trading of these products, even in times of market stress and volatility. However, until today, the SEC has remained steadfastly unwilling to allow spot Bitcoin ETPs into the U.S. market.

Meanwhile, the SEC has forced retail investors to gain Bitcoin exposure in less efficient ways in the securities market. For instance, retail investors can hold it through non-exchange-traded products or gain some exposure by purchasing companies or funds that own or mine Bitcoin. Moreover, in 2021, Bitcoin futures exchange-traded funds (ETFs) registered under the 1940 Act began trading because the SEC could not stop them. In 2022, the SEC approved the trading of Bitcoin futures ETPs registered under the 1933 Act. Compared to spot products, these futures-based products are more complex and harder to manage, which may lead to higher costs for investors. In any case, the basis for allowing these products to trade should be as strong as the basis for allowing spot products to trade: the high correlation between Bitcoin futures prices and spot prices means that the regulated futures market is equally important for products based on spot Bitcoin, just as it is for funds investing in Bitcoin futures. However, it wasn't until the court reminded us that "in failing to meet the standard of reasonable decision-making, we have unjustly devalued the apparent financial and mathematical relationship between the spot and futures markets" that we continued to reject spot Bitcoin ETPs.

The SEC has not acknowledged its mistakes but has provided a weak explanation for its change in position. In the past, the SEC rejected applications due to our bias against the underlying asset, citing concerns that the Bitcoin market was still immature and susceptible to manipulation. Today's approval order states that the SEC now believes it has demonstrated "means to prevent fraud and manipulation," as the prices of 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 gain Bitcoin exposure in a more convenient and investor-friendly manner. The only substantive change compared to our last rejection of similar applications is the court's rebuke.

We have wasted a decade of opportunity to fulfill our duties. If we had applied the standards we use for other commodity-based ETPs, we could have approved these products years ago, but we refused to do so until the court exposed our bluster. Even now, our approval is merely grudging, as we continue to insist that these products must meet a correlation test that we have never applied to other commodity-based ETPs. Perhaps the only silver lining is that we now know the SEC is capable of conducting robust correlation analyses, and perhaps the path to approving other spot cryptocurrency ETPs will not be as rocky as it is now (even if the SEC insists on continuing to apply a test that is not applied elsewhere).

Today's approval order does not erase the many harms caused by the unfair treatment in handling spot Bitcoin products.

First, our arbitrary and hasty handling of applications in this area will continue to damage our reputation outside the cryptocurrency space. A decrease in public trust will hinder our ability to effectively regulate the markets. This drama will tarnish the relationship between the industry and our staff in future interactions and will weaken the rich and informative dialogues that best protect investors.

Second, our disproportionate focus on these applications has diverted limited staff resources from other mission-critical work. Over the past decade, millions of dollars of staff time may have been spent blocking these applications.

Third, our actions here have muddied the public's understanding of the SEC's role. Congress did not authorize us to tell people whether specific investments are suitable for them, but we have abused administrative procedures to block investments we do not like from being available to the public.

Fourth, by failing to follow our normal standards and procedures in considering spot Bitcoin ETPs, we have created an artificial frenzy around them. If these products had been listed in the usual manner for similar products, we could have avoided the circus atmosphere we now find ourselves in.

Fifth, we have alienated a generation of product innovators in our field. Our unreasonable handling of these applications suggests that regulatory bias against new products and services may lead us to bypass the law and unreasonably delay product launches. The industry has documented hundreds of meetings, submitted and withdrawn documents, and made modifications, ultimately having to engage in costly legal battles to get us to today.

While this is a moment for reflection, it is also a moment for celebration. I am not celebrating Bitcoin or Bitcoin-related products; what a regulator thinks of 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 am also celebrating the persistence of market participants in trying to launch products they believe investors want. I commend the applicants for their tenacity in the face of the SEC's obstacles for a decade.