At the ground level, the crypto industry is hurting right now, but it still has a believer up on Capitol Hill in the form of the Securities and Exchange Commission’s Hester Peirce. Commissioner Peirce has long been a vocal advocate for crypto in Washington D.C., and a recent speech on regulation for the crypto industry posted to the SEC website took a fairly strong stance on the need for crypto regulation and the creation of a spot bitcoin exchange traded product.
Commissioner Peirce is a lawyer and has an extensive work history as various levels of counsel within the SEC and U.S. Senate and was appointed to the SEC in January 2018. Within crypto circles, Peirce has been dubbed “crypto mom” for her support of crypto within a regulatory body that has been slow to consider crypto beyond the risk it presents for investors. Her speech is not representative of the SEC but instead is her own personal opinions and perspectives.
“Watching the SEC refuse over the past four years to engage productively with crypto users and developers has prompted feelings of disbelief at the SEC’s puzzling, out-of-character approach to regulation,” wrote Peirce. “The Commission, of course, occasionally has explained its actions—or inaction—but those explanations often have been confusing, unhelpful, and inconsistent.”
The Perplexing Lack of a Spot Bitcoin Fund
Peirce took aim at the SEC’s refusal to approve a spot bitcoin fund as one of the prime examples of this inaction. Crypto, she explained, has been shackled with extra requirements above and beyond what other commodities that trade through exchange traded products have had to meet. This has meant that while bitcoin futures funds have been approved, no spot bitcoin funds have yet to pass through the obstacle course of SEC approval.
“The reasons for this resistance to a spot product are difficult to understand apart from a recognition that the Commission has determined to subject anything related to bitcoin—and presumably other digital assets—to a more exacting standard than it applies to other products,” Peirce said.
The SEC, in its 2021 warning regarding the incorporation of bitcoin futures in funds, overstepped its authority, Peirce believes.
“…we [speaking of the SEC] have no authority to tell funds that they cannot hold particular assets,” Peirce explained.
SEC Chair Gary Gensler eventually approved a bitcoin futures ETF in October 2021, citing specifically its adherence to the protections provided by a 1940 Act structure, as well as the added CFTC oversight of the futures market as reasons for its approval. A whole rash of bitcoin futures ETF approvals followed, all in a 1940 Act structure, but there was still no spot bitcoin ETP.
However, in 2022 the SEC approved a bitcoin futures ETP based on the Exchange Act of ’33.
“This approval implicitly acknowledged that the protections afforded by the 1940 Act are not relevant to the question of whether approval under the Securities Exchange Act of 1934 (Exchange Act) is appropriate,” Peirce wrote.
Despite Crypto Maturity, SEC Maintains Stance
Since then it’s been crickets, with denial after denial for spot bitcoin ETPs coming from the SEC. The denials hinge on the applicants (in this case the exchanges filing) to be able to prove that either they have a comprehensive surveillance-sharing agreement with a market or markets that are all regulated and of a significant size, or that there is proof that the underlying bitcoin markets are “uniquely resistant” to fraud or manipulation.
Peirce believes that the SEC simply isn’t taking any of the arguments made by the exchanges seriously and that the Commission isn’t taking the time to consider the nuances and characteristics that are unique to the funds being proposed, or their underlying markets.
What’s more, the crypto industry has grown substantially, becoming both more diverse and more liquid. Investors comprise a wide representational swath of players, from retail investors to institutions, insurance companies, banks, and public companies. Crypto has evolved to now offer trading platforms, hedge funds, trading firms, and custodians, all while bitcoin futures have continued trading since 2017.
Spot bitcoin ETPs are trading successfully, and have been for some time, on exchanges all around the world. At the end of the day, the concern about a U.S. spot bitcoin ETP making bitcoin retail exposure too easy for investors simply falls flat to Peirce: U.S. proponents of bitcoin and crypto are going to gain their exposure to these assets either way, and an approved vehicle could provide cost savings and a better tracked spot price than what is currently available.
“Investors might prefer a spot bitcoin ETP to other options, and we ought to care about what investors want,” Peirce said.
Why the Current Policy of Enforcement Doesn't Work
The lack of a spot ETP is part of a wider issue around the lack of any kind of meaningful, or even any real regulation relating to crypto in the U.S. Instead of tackling building a regulatory framework head-on, instead the SEC has gone about it piecemeal, giving hints to its views and perspectives through the enforcement actions it has taken.
While Peirce believes that enforcement is absolutely a necessary tool in dealing with “rampant fraud” within crypto, attempting to build an even loose type of regulatory framework through one-time enforcements is not the right approach. It comes down to the rights of crypto participants to be able to participate in the regulatory process by providing feedback and dialogue, something the current approach is lacking in wholesale.
“Enforcement actions short-cut the regulatory process,” Peirce said. “A preferable approach would have been, once we identified crypto lending as implicating the securities laws [speaking on the recent settlement between the SEC and BlockFi], to commence a rulemaking or invite crypto lenders and other members of the public to come in and discuss the appropriate path forward through careful use of our exemptive authority.”
Peirce doesn’t view the road ahead as hopeless but does believe the SEC will need to change its approach to crypto in order to keep the U.S. competitive by creating a meaningful regulatory framework that will allow investors access to this highly demanded space.
“Regardless of what one thinks of crypto, it is in both investors’ and the SEC’s interest to take a more productive approach,” Peirce said. The crypto industry stands “ready to work through the myriad questions and regulatory concerns around crypto. Now all we have to do is extend them a hand.”
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