What was Gary Gensler thinking?
The chair of the Securities and Exchange Commission cast the tie-breaking vote last week to approve 11 exchange-traded funds based on the spot price of Bitcoin. Over the objections of his fellow Democratic commissioners, Gensler argued that the decision was “the most sustainable path forward” after a court struck down the SEC’s prior attempt to deny an application.
The fact is, cryptocurrency markets are a mess. The SEC has brought lawsuits against three of the biggest trading platforms — Binance Holdings Ltd., Kraken and Coinbase Global Inc. — alleging numerous securities-law violations. Binance pleaded guilty last year to anti-money-laundering and sanctions violations in a $4.3 billion settlement. FTX, another big exchange, went bankrupt in 2022 after customer funds went missing. Bitcoin trading volume dropped after FTX’s implosion, and liquidity plunged. As of December, an estimated 60% of spot Bitcoin liquidity was offshore. A few big investors, some unidentified, own a significant portion of the existing tokens. One study found illegal wash trading accounted for an average 70% of trading volume on unregulated crypto exchanges.
Gensler himself — just after approving the new ETFs — warned investors to “remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto.”
So what was the rationale behind allowing investors to take more risks in these markets? To an extent, the SEC was boxed in by its decision in 2021 to approve ETFs based on Bitcoin futures. Those contracts may have seemed safer than spot Bitcoin ETFs because they trade on the CME Group’s regulated futures exchange. But they still derive their value from spot prices, established on platforms like Binance and Kraken. That link led the US Court of Appeals for the District of Columbia to overturn the commission’s denial of a spot Bitcoin ETF application.
Even so, Gensler should’ve tried to use this opportunity to force some investor protections on the spot trading platforms. Instead of issuing blanket accelerated approvals, the SEC could’ve made approval conditional on the ETFs deriving prices from platforms that meet the standards of regulated securities exchanges, such as adequate segregation of customer assets. For all their resistance to regulation, the trading platforms would have had a major economic incentive — not to mention pressure from the ETF sponsors — to adopt much-needed reforms.
