Should the US Securities and Exchange Commission approve an exchange-traded fund focused on the spot market for Bitcoin? The question has yet again gained relevance, thanks to the District of Columbia Court of Appeals, which last week reversed the SEC’s decision to reject a Bitcoin ETF proposed by Grayscale Investments.
The answer is yes: With a revised approach to the issue, the SEC could turn its loss into a win.
Set aside the irony of using an ETF to bet on Bitcoin, a technology supposedly designed to displace such traditional intermediaries. Maybe enthusiasts expect that Bitcoin’s many flaws — including extreme volatility, high transaction costs, inadequate throughput, and a large carbon footprint — will eventually be fixed, and that the benefits will somehow accrue to token holders. It isn’t regulators’ job to stop people from making bad decisions.
So why not just let it happen?
In a way, the SEC is already doing so: It has approved ETFs that track Bitcoin futures on the Chicago Mercantile Exchange. It’s less partial to ETFs like Grayscale’s because they would directly track the price on crypto exchanges such as Coinbase, which don’t face the same requirements for safety, soundness and investor protection that the CME does. This distinction makes little sense: If, say, “wash” trades on exchanges artificially inflate spot prices, they’ll affect futures, too. But given that the SEC is suing Coinbase for operating an illegal securities exchange, it’s understandably reluctant to approve an ETF with the company’s involvement.
A different approach could both establish more consistency and give regulators much-needed authority over crypto. The SEC could approve spot Bitcoin ETFs, provided that the exchanges involved meet the same standards that their regulated competitors do. Such conditionality would rationalize the rules while motivating big ETF sponsors (such as BlackRock and Fidelity) to monitor compliance.
It would also help resolve another persistent challenge. Because Bitcoin is defined as a commodity, it doesn’t fall under the SEC’s direct jurisdiction. Instead, it’s overseen by the Commodity Futures Trading Commission — but only when it comes to futures, not spot trading. The ETF approval could thus become an important step toward setting consistent standards across crypto, including for products that don’t fit into traditional categories. And it would in no way undermine the SEC’s enforcement of securities laws.
In the absence of action from Congress, regulators should do what they can to bring crypto into line without killing it off. Here’s an opportunity. People would still be free to lose their money on ill-considered bets. But they’d be much less likely to get ripped off along the way.
