On January 10, 2024, the U.S. Securities and Exchange Commission (“SEC”) approved eleven applications for spot exchange-traded funds (“ETFs”) tracking Bitcoin. This landmark moment for the crypto asset industry has been over 10 years in the making. Many retail investors can now add Bitcoin exposure to their existing investment portfolios with the click of a button and just as easily as they purchase shares in an ETF tracking the S&P 500 – no crypto wallets or exchanges necessary.
The SEC’s approval of the Bitcoin ETF applications comes on the heels of an August 2023 decision by the U.S. Court of Appeals for the District of Columbia that held that the SEC failed to adequately explain why it disallowed the listing and trading of a proposed Bitcoin ETF. The Court’s decision was the culmination of a decade-long battle between the SEC and those applying to launch Bitcoin ETFs, dating back to July 2013, when the first application for a Bitcoin ETF was filed. The SEC denied that application in March 2017, generally concluding that the crypto asset market and regulatory oversight regarding crypto assets were not sufficiently mature. In the face of these early SEC denials, innovators in the crypto asset space continued to explore alternative paths to provide retail investors with access to Bitcoin through various means, including investment trusts, Bitcoin futures products, and spot ETFs in other countries.
The SEC’s approval of the eleven Bitcoin ETF applications can only be described as reluctant. In Chairman Gensler’s statement immediately following the approvals, he said as much, explaining that “the Commission disapproved more than 20 exchange rule filings for spot bitcoin ETPs,” and that this round of applications was similar to the previously doomed applications. Gensler acknowledged, however, that the circ*mstances were different after the Court of Appeals’ August 2023 ruling, such that approving the applications became “the most sustainable path forward.” This change in circ*mstances for the Bitcoin ETF applications does not mean, however, that the SEC’s overall view on crypto assets has softened. As Gensler emphasized, “[w]hile we approved the listing and trading of certain spot bitcoin ETP shares today, we did not approve or endorse bitcoin.”
If any question remained whether the SEC’s approval of the Bitcoin ETF applications might signal that the SEC was softening its stance on crypto, Gensler’s post-approval statement answers that question with an emphatic “no.” Even in announcing the approval of a financial product where the underlying asset is Bitcoin, Gensler warned the public that “investors should remain cautious about the myriad risks associated with bitcoin” and that Bitcoin is “primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing.”
Gensler’s statement also suggests that attempts to launch ETFs based on other crypto assets will meet fierce SEC opposition. His statement emphasizes that the SEC’s approval “is cabined to ETPs holding one non-security commodity, bitcoin” and that the approval “should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities.”
Beyond offering a renewed sense of legitimacy to an industry whose reputation has recently been marred by scandal and unease, the SEC’s approval has the practical effect of allowing more risk-averse retail investors to gain exposure to Bitcoin without actually holding Bitcoin, itself. Indeed, the new Bitcoin ETFs would operate in much the same way as traditional ETFs, which investors can access through their brokerage accounts and on smartphones with the click of a button. This newfound availability on SEC-regulated financial exchanges means more investors can gain Bitcoin exposure without the hassle of buying the crypto asset itself. That said, some large financial institutions may have reservations about offering Bitcoin ETF access to retail customers from a “suitability” or “best interest” perspective, and the SEC and other regulators may closely scrutinize the institutions that do.
The SEC’s decision on Wednesday in granting approval for Bitcoin ETFs should be seen by crypto enthusiasts and retail investors alike as a major milestone in the push for crypto assets to become more institutionalized, more recognized as an independent asset class, and more widely available to retail investors. Despite the exciting news for investors, the decision should not be interpreted as a sea change in crypto asset regulation – at least from the SEC’s perspective. It will, however, likely signal an influx of applications to launch ETFs with crypto assets other than Bitcoin (Ethereum or Ripple, for example). The approval of such products will likely face an even longer road to approval than Bitcoin ETFs, given Gensler’s frequent distinction between most crypto assets that he believes are “securities,” and Bitcoin, which hehas characterized as a “commodity.”
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