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Bitcoin Fails to Make SEC Chief's To-Do List: 2022 Outlook

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What You Need to Know

  • The agency's recently released regulatory flexibility agenda makes no mention of crypto, to the chagrin of the conservative commissioners.
  • The SEC chairman is particularly worried about the cryptocurrency exchanges and has urged them to properly register with the SEC.
  • The SEC has approved three Bitcoin futures ETFs.

The two Republican commissioners at the Securities and Exchange Commission wasted little time in mid-December complaining that SEC Chairman Gary Gensler’s regulatory to-do list for next year left out any mention of cryptocurrencies.

Gensler’s newly released regulatory flexibility agenda “comes up short on furthering the investor protection prong of our mission by failing to provide more clarity on digital assets,” SEC Commissioners Hester Peirce and Elad Roisman wrote in a joint statement.

The agenda, the two said, “makes no mention of any regulation with respect to digital assets. In the last several years, this sector has grown in size, complexity, diversity, and investor interest.”

Roisman and Peirce continued: “Rather than taking on the difficult task of formulating rules to allow investors and regulated entities to interact with digital assets, including digital asset securities, the Agenda — through its silence on crypto — signals that the market can expect continued questions around the application of our securities laws to this area of increasing investor interest.”

They added: “Such silence emboldens fraudsters and hinders conscientious participants who want to comply with the law.”

Jim Lundy, partner in Faegre Drinker’s Chicago office and a former SEC attorney, said that “rulemaking in the cryptocurrency space by the SEC will be very high-profile, controversial, and may perhaps need coordination with other agencies, such as the CFTC.”

Tackling crypto regulation “may have been too ambitious to have on Chair Gensler’s first full-year rulemaking agenda,” Lundy opined.

Gensler will “engage in regulatory efforts in this space during his tenure, but apparently not in 2022,” Lundy said. “Until regulatory efforts are undertaken, the SEC will likely continue to engage in regulation by enforcement in this area.”

Gensler’s Concerns

Gensler has said that cryptocurrency technology is now essentially a “teenager” and argued that it “will not reach adulthood if it doesn’t come within the public policy framework.”

The SEC chairman is particularly worried about the cryptocurrency exchanges and has urged them to properly register with the SEC.

Gensler told lawmakers in early October that SEC staffers have initiated “projects” on:

  • The offer and sale of crypto tokens.
  • Crypto trading and lending platforms.
  • Stable-value coins.
  • Investment vehicles providing exposure to crypto assets or crypto derivatives.
  • Custody of crypto assets.

Regulatory flexibility agendas are projected rulemakings that an agency expects to tackle and are subject to change.

Morningstar warned recently that despite the recent approval of the first crypto futures exchange-traded fund by the SEC, “crypto investing remains an investor-beware zone.”

Morningstar continued: “Price volatility, technological hurdles, regulatory gaps, the absence of government-backed insurance, and the scarcity of professional advice provide additional reasons for investors to exercise caution when considering how much to invest in cryptocurrencies and in selecting an exchange platform on which to trade.”

Spot Bitcoin ETF Coming?

The SEC has approved three Bitcoin futures ETFs so far.

On Dec. 23, the SEC rejected a pair of proposals to offer physically-backed Bitcoin exchange-traded funds. The SEC said that the proposals from Valkyrie Investments and Kryptoin failed to meet requirements to prevent fraudulent and manipulative practices that are needed to protect investors.

On Nov. 15, a third Bitcoin futures ETF debuted, charging a lower fee than the two already on the market. The VanEck Bitcoin Strategy ETF (XBTF) will list on the Cboe with an expense ratio of 0.65%, compared with the 0.95% fee charged on the Bitcoin futures ETFs introduced in mid- and late October by ProShares and Valkyrie.

On Nov. 12, the SEC rejected VanEck’s application to trade a spot Bitcoin ETF on the grounds that its listing exchange, the Cboe, failed to demonstrate it had sufficient means “to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.”

Then, on Dec. 3, the commission rejected the WisdomTree Bitcoin Trust.

The SEC could also soon issue its first opinion on Grayscale’s application to convert its Bitcoin trust to a Bitcoin ETF.

Attorneys for Grayscale told the SEC in a letter on Nov. 29 that “the Commission has no basis for the position that investing in the derivatives market for an asset is acceptable for investors while investing in the asset itself is not. But having permitted the listing of multiple Bitcoin futures ETFs in the last several weeks, that is the policy decision the commission would announce were it to deny NYSE Arca’s application to list” the Grayscale Bitcoin Trust.

Craig Salm, head of legal at Grayscale Investments, told ThinkAdvisor in a recent interview that “if the Commission is seemingly OK with a futures [Bitcoin ETF] then they have to be OK with a spot one because both are based on the underlying Bitcoin markets.”

The benefit to converting the Grayscale Bitcoin Trust to an ETF is that “once it converts, it will be more efficient and more closely track NAV,” Salm said.

On Nov. 10, SkyBridge’s Bitcoin Review newsletter reported that the cryptocurrency market “hit a new milestone — the total market cap surpassed $3 trillion, which is four times the cryptocurrency market cap at the end of 2020.”

This growth, SkyBridge said, “was largely driven by Bitcoin reaching a new all-time high, pushing through the $68,000 mark earlier” that week.

Institutions continue to explore new avenues to get involved in the crypto space, SkyBridge said.

“Goldman Sachs and other Wall Street banks have started looking into how to use Bitcoin as collateral for cash loans to institutions. While they will not touch cryptocurrency spot markets, they are considering using synthetic crypto products such as futures,” SkyBridge argued.


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