As Asia (Korea, Japan, Hong Kong…) and Europe (Switzerland, Malta, Gibraltar..) work to create friendly regulatory environments for Crypto, driving innovation and investment, U.S. regulators struggle to approve the most simple of Crypto investment vehicles. The latest regulatory fail is the SEC’s decision on July 26th to deny the Winkelvoss’ bitcoin trust the ability to list and trade shares as an ETF. The majority ruling was 92 pages of equivocating drivel. What was far more interesting, was the dissenting opinion of SEC Commissioner Hester Pierce. Below are twelve thoughts from Pierce’s dissenting opinion worthy of highlighting:
- More institutional participation would ameliorate many of the Commission’s concerns with the bitcoin market that underlie its disapproval order.
- …the Commission’s interpretation and application of the statutory standard sends a strong signal that innovation is unwelcome in our markets
- The Approval of this order would demonstrate our commitment to acting within the scope of our limited role in regulating the securities markets.
- The concerns underlying the disapproval order go to the merits of bitcoin as an investment. … if the disapproval order’s rigorous standard were applied consistently, many commodity-based ETPs would be in peril, as rumors of manipulation plague many commodity markets,
- In disapproving the proposed listing, the Commission points to problems in the bitcoin market that I believe would be mitigated by institutionalizing the market — a phenomenon that bitcoin ETPs would foster. …The disapproval …suggests that approval for bitcoin ETPs will come only when bitcoin spot and derivatives markets have matured substantially, yet, at the same time, contributes to further delay in their maturation…
- Investors who want to diversify their portfolios by adding a bitcoin component will be relegated to the spot market, which will not benefit from the increased institutional discipline that approval of this product would bring. These investors also will not have access to the types of disclosures that a listed ETP would provide
- Investors would benefit from having multiple, competing options for gaining exposure to bitcoin. It is also important that we not give one sponsor a monopoly in providing bitcoin ETPs.
- Even if all the ETPs we approve fail to generate investor interest, approval of such products would further the Exchange Act objective of “removing impediments to . . . a free and open market” and empower them to make their own decisions about the merits of these products. The majority’s disapproval erects impediments and disempowers investors.
- The disapproval order’s broad interpretation of the Commission’s statutory mandate signals that the Commission reserves for itself the authority to judge when an innovation is ripe enough, respectable enough, or regulated enough to be worthy of the securities markets.
- …the Commission signals an aversion to innovation that may convince entrepreneurs that they should take their ingenuity to other sectors of our economy, or to foreign markets, where their talents will be welcomed with more enthusiasm.
- …bitcoin mining is not geographically limited (except to the extent it migrates to places with cheap electricity), so it is not subject to geopolitical threats that plague other commodity markets.
- In sum, I would rather we err on the side of approving products so that investors, who are generally better judges about these things than we are, can form their own views about a particular innovation and act on those views in the market.
Pierce’s Conclusion
By precluding approval of cryptocurrency-based ETPs for the foreseeable future, the Commission is engaging in merit regulation. Bitcoin is a new phenomenon, and its long-term viability is uncertain. It may succeed; it may fail. The Commission, however, is not well positioned to assess the likelihood of either outcome, for bitcoin or any other asset. Many investors have expressed an interest in gaining exposure to bitcoin, and a subset of these investors would prefer to gain exposure without owning bitcoin directly. An ETP based on bitcoin would offer investors indirect exposure to bitcoin through a product that trades on a regulated securities market and in a manner that eliminates some of the frictions and worries of buying and holding bitcoin directly. If we were to approve the ETP at issue here, investors could choose whether to buy it or avoid it. The Commission’s action today deprives investors of this choice. I reject the role of gatekeeper of innovation — a role very different from (and, indeed, inconsistent with) our mission of protecting investors, fostering capital formation, and facilitating fair, orderly, and efficient markets. Accordingly, I dissent.
