On January 10, 2024, the SEC issued an order granting accelerated approval of the first eleven US-listed spot bitcoin exchange-traded fund (ETF) applications under to Section 19(b)(1) of the Securities Exchange Act of 1934, as amended (Exchange Act). These spot bitcoin ETF products offer institutional and retail investors exposure to bitcoin without holding it directly. The following ETFs are subject to the approval order:

The approval follows the US Court of Appeals decision in Grayscale Investments, LLC v. Securities and Exchange Commission, in which where the court found that the SEC wrongly rejected the application of Grayscale Investments, LLC to convert its spot bitcoin trust, Grayscale Bitcoin Trust, into the first spot bitcoin ETF (Grayscale Invs., LLC v. Sec. & Exch. Comm'n, (D.C. Cir. Aug. 29, 2023); see Legal Update, Grayscale Investments, LLC v. SEC: Court Finds Denial of Spot Bitcoin ETF Arbitrary and Capricious). As detailed by Reuters News, the approval represents a journey that began in 2013, when the first spot bitcoin ETF application was filed with the SEC by Cameron and Tyler Winklevoss, co-founders of crypto exchange Gemini.

The NYSE Arca, Inc. (NYSE Arca), Nasdaq Stock Market LLC (Nasdaq), and Cboe BZX Exchange, Inc. (BZX) each filed rule change proposals with the SEC to list and trade shares of bitcoin-based commodity-based trust shares and trust units, as modified by respective amendments filed earlier this week.

The order reflects the SEC's findings that the proposals are consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that exchange rules be designed to prevent fraudulent and manipulative acts and practices and, in general, to protect investors and the public interest. The order also reflects the SEC's finding that the proposals are consistent with Section 11A(a)(1)(C)(iii) of the Exchange Act, which requires that SEC approval be in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities.

The SEC order further notes that these ETF exchange applications did not raise any novel regulatory issues and that the exchanges assisted the SEC in evaluating the proposals and in determining that they are consistent with the Exchange Act and its rules and regulations applicable to a national securities exchange.

A spot bitcoin ETF allows investors to gain exposure to the price of bitcoin without the complications and risks of owning bitcoin directly including, setting up crypto wallets and accounts with crypto exchanges (some of which have poor cyber security records and are prone to hacks). As noted by SEC Chair Gary Gensler, sponsors of bitcoin exchange traded products (ETPs) will be required to provide full disclosure about the products, which will be listed and traded on registered national securities exchanges. Such regulated exchanges are required to have rules designed to prevent fraud and manipulation. These exchanges also have rules designed to address certain conflicts of interest as well as to protect investors and the public interest.

The ETF structure boosts the accessibility of bitcoin for institutional investors, some of which are barred from investing directly in alternative assets. The spot bitcoin ETFs will be accessible through existing retail investor brokerage accounts, which are also closely supervised.

According to the SEC, each exchange has a comprehensive surveillance-sharing agreement with the Chicago Mercantile Exchange (CME) via their common membership in the Intermarket Surveillance Group. This facilitates the sharing of information that is available to CME through its surveillance of its markets, including its surveillance of the CME bitcoin futures market. Because CME’s surveillance can assist in detecting impacts on CME bitcoin futures prices, the exchanges’ comprehensive surveillance-sharing agreement with the CME – a US regulated market whose bitcoin futures market is consistently highly correlated to spot bitcoin – can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the proposals.

In the original filings of their respective proposals, Nasdaq and BZX had each stated that they expected to enter into a bilateral surveillance-sharing agreement with Coinbase, Inc., which was to provide supplemental access to certain data regarding spot bitcoin trades on Coinbase (see Legal Update, Spot Bitcoin ETF Applications Re-Filed After SEC Notes Deficiencies). The SEC noted that it had received conflicting public comment on whether such Coinbase market-surveillance agreements would adequately address the SEC's concerns around market manipulation with respect to the operation of spot bitcoin ETPs. Commenters who asserted the Coinbase arrangement would add negligible value noted that Coinbase is not registered with the SEC or the CFTC, maintains a small fraction of overall global spot bitcoin trading, and using only Coinbase for surveillance purposes could introduce a single point of failure.

For further detail on these, see Bitcoin ETF Tracker.

For details on crypto regulation in the US, see Cryptocurrency and Virtual Currency Regulatory Tracker.