Posted: 05/02/2024
A compromised government ‘X’ account, volatility which would send most retail investors running for the hills, and a regulatory development which saw US$4.6 billion in a newly legal financial instrument traded on day one…just another normal day in crypto.
On 10 January 2024, the United States of America’s Securities and Exchange Commission (SEC) approved 11 US listed exchange traded funds (ETFs) tracking Bitcoin, following months of speculation that such a move was imminent (which followed hopes of the same for some years).
Many (although certainly not all) proponents of cryptoassets welcomed this step by the SEC, as representing a high-profile vote of confidence in Bitcoin (specifically) which would substantially grow the acceptance and adoption of the asset in a way which has not been seen since the first reputable, commercial exchanges opened. It is therefore worth exploring what exactly the SEC has done, what it means, and what the position in the UK is, in contrast.
In the UK, an ETF is defined by the Financial Conduct Authority (FCA) – taking its definition from the European MiFIR legislation – as: ‘a fund of which at least one unit or share class is traded throughout the day on at least one trading venue and with at least one market maker which takes action to ensure that the price of its units or shares on the trading venue does not vary significantly from its net asset value and, where applicable, from its indicative net asset value’.
In short, it is a form of investment which consists of and therefore tracks an underlying asset or assets, and which can be freely traded at any time on a market.
The potential benefits often cited for ETF ownership are numerous, but they are frequently said to include abundance, ease and relative low cost of trading, mixture of composition allowing diversification of risk and, most importantly for the purposes of this article, that they enable fractional ownership of underlying assets.
Prior to the announcement on 10 January 2024, the SEC had rejected more than 20 applications for ETFs containing cryptoassets. One of these refused applications, by ‘Grayscale’, was subject to legal challenge, with the US Court of Appeals for the District of Columbia holding that the SEC failed to adequately explain the reason behind the decision.
The SEC’s statement on the approval of the first 11 Bitcoin ETFs suggested that the reason for the rejection of previous applications was that they did not meet the normal requirements for an ETF (with any underlying asset class, crypto or otherwise) to be approved, whereas the now-trading 11, did.
On 9 January 2024 at 9.11PM, the official SEC X account posted a message with the following text:
‘Today the SEC grants approval for #Bitcoin ETFs for listing on all registered national securities exchanges. The approved Bitcoin ETFs will be subject to ongoing surveillance and compliance measures to ensure continued investor protection.’
The message was accompanied by a picture of SEC chair Gary Gensler with the following quote: ‘Today’s approval enhances market transparency and provides investors with efficient access to digital asset investments within a regulated framework.’
Shortly after the post went live, the same account, just over 30 minutes later, posted to clarify that the original X/tweet was ‘unauthorized’ with a suggestion that the SEC X account had been ‘compromised’. It stated that the listing and trading of Bitcoin ETFs had not, in fact, been approved.
Nevertheless, in the time between the original ‘compromised’ post going live, and the retractions, Bitcoin had risen, and fallen, in value by nearly US$2,000, showing that there was appetite for the approval of the product, recognition that such approval would benefit Bitcoin’s value, or both.
The next day, 10 January 2024, the SEC did release an (authorised) statement confirming that it had, in fact, approved certain cryptoasset ETFs. In that statement it said:
‘If the issuer of a security and the listing exchange comply with the Securities Act, the Exchange Act, and the Commission’s rules, that issuer must be provided with the same access to our regulated markets as anyone else.’
It is also vital to note however that despite this significant development, the SEC’s decision is not a blanket approval of ETFs containing cryptoassets (in fact, it is expressly not such an approval). Indeed, the SEC statement clarifies that:
‘Importantly, today’s Commission action is cabined to ETPs holding one non-security commodity, bitcoin. It should in no way signal the Commission’s willingness to approve listing standards for crypto asset securities. Nor does anything about the Commission’s views as to the status of other crypto assets under the federal securities laws or about the current state of non-compliance of certain crypto assets market participants with the federal securities laws.’
In their first day of trading, the 11 cryptoasset containing ETFs that were approved by the SEC on 10 January saw US$4.6 billion worth of trading.
In the UK, the FCA has specifically taken steps to ban ‘the sale, marketing and distribution to all retail consumers of any derivatives…and ETNs that reference unregulated transferable cryptoassets by firms acting in, or from, the UK’. Such prohibition has been in force since early 2021.
In its press release, published on 6 October 2020, the FCA provided a summary of its reasons for the ban (with those reasons expanded upon in its policy statement PS20/10), which include that: ‘retail consumers can’t reliably assess the value of derivatives (contracts for difference, futures and options) and exchange traded notes that reference certain cryptoassets. This is due to the: inherent nature of the underlying assets which have no reliable basis for valuation; presence of market abuse and financial crime…; extreme volatility in cryptoasset prices movements; [and] inadequate understanding by retail consumers of cryptoassets and a clear investment need for investment products referencing them.’
Moves in the US have certainly shown there is appetite for crypto linked ETFs. However, it is doubtful that this will result in wider changes in the position as regards these products in the near future, both in the US and in the UK.
In the US alone, the decision of the SEC was made on a very narrow basis, limited not only to specific cryptoasset linked ETFs, but particularly to Bitcoin-linked ETFs, with some citing the supposed relative stability of this cryptoasset’s value as being one essential ingredient which led to the SEC’s approvals.
Whilst that may address one of the FCA’s concerns (arguably – the FCA may not accept that Bitcoin passes the threshold for stability it had in mind when ordering the prohibition), and whilst the decision will create pressure on the FCA (and provide strength to agitators who wish for the ban to be lifted), it does not seem that such pressure will actually result in the FCA changing position.
This is because primarily it appears that the FCA is redoubling its efforts to fulfil its key mission of protecting consumers (as can be seen by the creation of its new ‘consumer duty’). In such an environment, it is not realistic that some arguable improvements in the situation around the cryptoasset market in general (as it previously saw it and sees it now) would result in any of its underlying concerns justifying its stance from falling away.
It also seems unlikely that, given its current campaign, it will not adopt a more laissez-faire approach. Nor does it seem likely that the FCA would make an exception for products linked to a single cryptoasset for fear that it may create a flood of challenges from others which it would not approve (regardless of the merits of the underlying cryptoasset).
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