On January 10, the SEC finally approved 11 spot bitcoin ETFs after a decade of applications. However, despite the approval, the funds still attracted criticism, even from senior figures within the Commission.
Indeed, Commissioner Caroline Crenshaw was a particularly loud dissenting voice. Her criticism focused on fraudulent information from crypto exchanges, wash trading, and illogical reasoning by ETF sponsors.
Crenshaw called the SEC’s proposed rule changes “unsound and ahistorical” and also claimed that these rule changes will weaken the SEC’s ability to protect investors.
She cited rampant fraud and manipulation in bitcoin spot markets, pointing out that wash trading in bitcoin markets could account for as much as 77.9% of the trading volume on unregulated exchanges.
Crenshaw also called out illogical reasoning by ETF sponsors, including their assertion that bitcoin futures markets track the price of spot bitcoin. She noted that this is an obvious causation/correlation fallacy. Just because futures and spot markets have tracked one another historically does not mean that one market’s price will continue to cause the other market to reliably re-price.
Commissioner Crenshaw disagrees with Grayscale ruling
Commissioner Crenshaw also voiced concerns over the concentration of bitcoin ownership, which can lead to one ‘whale’ or big mining firm using their holdings to manipulate the currency’s price. She cited the “lack of unified oversight” of digital asset exchanges leading to possible fraudulent activity.
She also disagreed with the D.C. District Court of Appeals’ ruling in favor of Grayscale. According to Crenshaw, futures markets are different from spot markets even though the underlying asset can be the same.
Futures markets are normally regulated by the CFTC and involve contracts to deliver an asset for a preset price at a future date. Spot markets involve trading the assets directly, not contracts for future delivery.
Crenshaw took issue with the relatively unregulated nature of spot bitcoin markets. The SEC’s reasoning behind its initial rejections of spot bitcoin ETFs involved their issuers’ lack of ability to guarantee that there would be no fraud or market manipulation.
One important issue in the Grayscale case involved the SEC’s approval of bitcoin futures ETFs while rejecting spot bitcoin ETFs. Grayscale argued that any differences were just details since bitcoin futures and spot markets depended on the same underlying asset. The judge agreed, calling the different treatment of similar products “arbitrary and capricious.”
ETF issuers cannot guarantee that spot bitcoin exchanges prevent manipulation, fraud, and wash trading. This would be hard to do, considering that even Coinbase and Binance became targets for enforcement actions within the past year.
Despite her disagreement about the approvals of 11 spot bitcoin ETFs, Crenshaw didn’t take issue with Bitcoin itself, agreeing that it operates as a peer-to-peer electronic cash system. Instead, her gripes are centered around non-Bitcoin investment options like spot ETFs and opaque crypto exchanges, and the fact that the SEC has to contort its own rules now after losing the Grayscale case.
Five commissioners make up the SEC and most votes require a simple majority — leaving up to two dissenting opinions per SEC action. In the majority opinion, chairman Gary Gensler cited Grayscale’s successful legal challenge to the SEC’s rejection of GBTC’s conversion into an ETF. In Grayscale’s victory, the courts encouraged the SEC’s lawful rule change that allows the listing of spot bitcoin ETFs.
Gensler clarified that despite the approval of the bitcoin ETFs, the SEC does not endorse bitcoin nor recommend any particular investment.