On July 26, 2018, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) issued an order disapproving a proposed rule change that would have allowed for a bitcoin exchange-traded product (“ETP”) (the “Order”). However, the Order was not unanimous amongst the SEC’s Commissioners. Commissioner Hester M. Peirce issued a stand-alone dissent against the Order, arguing that the SEC mischaracterized their worries with the ETP and that the Commission was teetering on stifling the innovation of new investment products in the United States (in this context-bitcoin).
The Order Satisfies the Securities Exchange Act of 1934
First, Commissioner Peirce disagreed with the Commission and argued that the proposal for a rule change to allow for the bitcoin ETP (the “Proposal”) satisfies certain requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). The Exchange Act requires the SEC to evaluate whether the rules of a national securities exchange (such as Bats BZX Exchange, Inc. (“BZX”)) are designed to prevent fraud and protect investors. Commissioner Pierce argued that the SEC erroneously focuses on the characteristics underlying the spot market for bitcoin rather than whether the rules of BZX are designed to prevent fraud and protect investors. For Commissioner Pierce, BZX and its rules could adequately play the role of watch dog over the underlying bitcoin spot markets.
Denying the Order Slows the Institutionalization of Bitcoin
Second, Commissioner Peirce points out a circular issue with the Order: the SEC rejected the Proposal in part because of a lack of institutionalization of the bitcoin markets, which could be enhanced by institutional products such as a bitcoin ETP. In addition, Commissioner Peirce argues that disapproving the Proposal will only discourage new institutional participants from entering the market for bitcoin. For Commissioner Pierce, a lack of institutional participation in turn only undermines the chances for investor protection (the SEC’s key reason for rejecting the proposal).
Denying the Order Slows Innovation
Third, Commissioner Peirce argues that denying a bitcoin ETP sends out a signal that the SEC is a gate-keeper for what products are ready for the markets and when. For Commissioner Peirce, the SEC should not play the role of gatekeeper of new technologies, but rather serves to evaluate whether new products do not place investors in undue harm. She points out that in rejecting the Proposal, the SEC risks pushing innovation, particularly with bitcoin and cryptocurrencies that are not geographically limited.