SEC’s bitcoin ETF sign-off comes with a stark reminder of its lingering doubts

The Securities and Exchange Commission’s landmark approval of the first-ever spot bitcoin exchange traded funds this week came with a stark reminder of the agency’s divisions over cryptocurrencies and scepticism towards a market some still see as dangerous for investors. 

After refusing to greenlight the products for a decade, the SEC’s hand was finally forced by a US federal appeals court ruling last year. On Thursday, 10 spot bitcoin ETFs started trading with SEC approval, from sponsors ranging from established players such as Fidelity and BlackRock to more digital businesses including Grayscale and Ark Invest. One more ETF was still in the process of going live.

It was a watershed moment for a sector that the agency’s chair Gary Gensler has called a “wild west” rife with non-compliance and misconduct, and a big win for the crypto industry after a bitter legal battle with the SEC.

But those hoping for a sea change in the regulator’s approach to digital assets will be disappointed, analysts warn. Nor has the approval convinced traditional finance to give a full-throated endorsement, with some of the players that launched such ETFs saying it was up to individual investors to decide whether those products are right for them.

Much room in a statement from Gensler accompanying the decision was given to explaining what the SEC’s decision was not. It did not “endorse” crypto trading platforms or intermediaries, which are mostly “non-compliant with the federal securities laws and often have conflicts of interest”, he wrote. It focused just on ETFs holding bitcoin and “in no way [signalled] the Commission’s willingness to approve listing standards for crypto asset securities”.

And it did not “signal anything” about the SEC’s position on other crypto assets’ standing under US securities laws nor on crypto players’ non-compliance, he added.

“While we approved the listing and trading of certain spot bitcoin [exchange traded product] shares today, we did not approve or endorse bitcoin,” concluded Gensler, who called bitcoin a “primarily . . . speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion, and terrorist financing”.

“Clearly, he didn’t want to do this,” said Ian Katz, financial policy analyst at research firm Capital Alpha Partners. “He felt like he had to because the court put him in a position where he really didn’t have any other options. And even at that, he waited until the last possible moment to do it.” Wednesday was the final day of the SEC’s statutory deadline for a decision.

Beyond Gensler, the rest of the commission, whether for or against the decision, also expressed concerns.

“Everyone found something to be annoyed about,” Katz said. The outcome “didn’t satisfy anyone, in short because the Democrats would rather this had not been approved and the Republicans thought it should have been approved earlier and in a different way”. 

The SEC’s two Republican commissioners, who support the crypto sector, were in favour of the move. But Hester Peirce argued the SEC had already “squandered a decade of opportunities to do our job” and “created an artificial frenzy” around the new ETFs “by failing to follow our normal standards and processes”.

Mark Uyeda criticised the framework used for the approvals as “invent[ing] a novel . . . standard” that treats the products differently than the bitcoin futures ETFs that the commission has previously approved. The SEC’s “flawed reasoning . . . could reverberate for years to come”, he said. 

Caroline Crenshaw, one of the SEC’s three Democratic commissioners, dissented, saying the approvals were “unsound and ahistorical” and put the regulator on “a wayward path that could further sacrifice investor protection”.

Even some of the established players who received the SEC’s go-ahead to launch bitcoin ETFs appeared tepid. 

Executives at BlackRock, which launched a Nasdaq-listed bitcoin ETF, said that the group was not recommending that investors allocate a specific amount of money to digital currencies. The offering “is about providing a higher-quality access vehicle to investors who want bitcoin exposure”, said Robert Mitchnick, BlackRock’s global head of digital assets.

Vanguard, which did not sponsor any of the new funds, on Thursday said spot bitcoin ETFs would not be available on its platform. “These products do not align with our offer focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio,” it said.

The SEC’s approvals have also highlighted fissures in the US Congress over crypto policy. Elizabeth Warren, the Democratic senator from Massachusetts and crypto critic, said there was “no doubt the SEC made the wrong decision here”.

“If the SEC is going to let crypto burrow even deeper into our financial system, then it’s more urgent than ever that crypto follow basic anti-money laundering rules,” she said.

There was some celebration, however, from Republican lawmakers who have been supportive of the industry and critical of Gensler for what they have deemed to be regulatory over-reach.

Republicans on the House financial services committee, including chair Patrick McHenry, called it “a historic milestone for the future” of digital assets in the US and a “significant improvement over the SEC’s track record of regulation by enforcement”. 

But a tectonic shift in the SEC’s approach to crypto still seems unlikely. The SEC has unleashed a series of enforcement actions against the crypto sector targeting a wide range of players, from the biggest exchanges to celebrities allegedly failing to disclose how much they were paid to market tokens. And Gensler has declined to craft new rules for digital assets, arguing existing laws are sufficiently clear.

“If anyone were to think for a second that this indicates some sort of warming or thawing of Gensler towards crypto, no, not at all, not even close,” said Katz. “And he made that very clear.”

Additional reporting by Brooke Masters and Scott Chipolina