Statement Dissenting from Approval of Proposed Rule Changes to List and Trade Spot Bitcoin Exchange-Traded Products

SEC Commissioner Caroline A. Crenshaw
Jan. 10, 2024

Today the Securities and Exchange Commission approved a series of proposed rule changes that will allow for the listing and trading of bitcoin-based products on national securities exchanges.[1] These Commission actions are unsound and ahistorical. And worse, they put us on a wayward path that could further sacrifice investor protection. I cannot agree that these actions serve either our statutory or foundational investor protection mandates and, as such, I dissent from today’s Order.

I. Background
The proposed rule changes were filed pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) and applicable rules thereunder to list and trade shares of trusts that would hold spot bitcoin (the “exchange traded products” or “ETPs”).[2] The Commission must find that such proposals are consistent with the Exchange Act in order to approve them, which requires that the rules be designed to “prevent fraudulent and manipulative acts and practices” and “protect investors and the public interest.”[3]

Despite an ample and growing body of evidence indicating that the proposed rule changes are not reasonably designed to prevent fraudulent or manipulative acts and practices, or to protect investors or the public interest, the Commission’s Order finds that this standard is met. For the reasons discussed below, I strongly disagree.

II. The Global Spot Markets Underlying the Bitcoin ETPs are Marred by Fraud and Manipulation, Concentrated, and Without Adequate Oversight
The ETPs that will be enabled by today’s Order are inextricably tied to the bitcoin spot markets. Fraud and manipulation that impacts the price of spot bitcoin surely impacts the price of the spot bitcoin held in the ETPs. So, our investor protection inquiry necessarily begins with the spot bitcoin markets. Are those markets safe? Substantial evidence indicates that the answer is no.

The spot markets that trade bitcoin are located all around the world. U.S. regulators, such as the Commission, have limited visibility into these spot markets. What little information we do have, however, is not reassuring.[4]

Fraud and Manipulation
Spot bitcoin markets are subject to fraud and manipulation.[5] One form of manipulation that appears to be pervasive in the crypto markets (and specifically bitcoin markets), is wash trading, a practice whereby traders seek to increase the appearance of high trading interest by both selling and buying the same products at the same time, often driving up prices, and then selling to unwitting third party market participants at inflated values. Wash trading distorts price and volume, causes volatility, reduces investor confidence and participation in financial markets, and of course, results in investor harm.[6] One analysis of 29 major crypto exchanges found that wash trading was, on average, as high as 77.5% of the total trading volume on unregulated exchanges.[7] The same researchers estimated that wash trading was present in over $4.5 trillion of crypto spot market trading and $1.5 trillion in crypto derivatives trading in the first quarter of 2020 alone.[8] Likewise, the Commission’s complaint against Binance and its affiliates alleges that the Defendants failed to implement trade surveillance or manipulative trading controls on the Binance.US platform (despite the fact that such controls were touted to investors); and, that the lack of such controls enabled Binance affiliates to engage in wash trading in select cryptocurrencies in order to artificially inflate trading volume.[9]

Specifically with regard to bitcoin, an analysis of 157 crypto exchanges found that 51% of the reported daily bitcoin trading volume was likely bogus.[10] In fact, though reporting regarding bitcoin frequently discusses the enormous size of the market, one market participant who now seeks to sponsor a spot bitcoin ETP has admitted that “approximately 95%” of the data used by many participants are “fake and/or non-economic.”[11] Indeed, in one salient example, according to testimony by one of his co-conspirators, the former CEO of FTX may have engaged in bitcoin price manipulation in an effort to keep its price under $20,000, presumably to the benefit of his company and himself.[12] In short, prices and demand for bitcoin may not actually be what they appear to be.

Indeed, just yesterday, prior to the issuance of our approval Order, one of the SEC’s social media accounts was compromised, and an unauthorized post falsely indicated that we had approved spot bitcoin ETFs.[13] Unsurprisingly, the price of spot bitcoin suffered “whiplash” in the minutes and hours following the false tweet.[14] While the facts underlying this misconduct hopefully will be uncovered by law enforcement in the future, I will be monitoring what may be yet another attempt to profit from wrongdoing in this market.

Concentration of Ownership
Concentration of ownership among spot bitcoin holders also leaves bitcoin investors (and now spot bitcoin ETP investors) vulnerable to the whims and trading practices of a few. Analysis shows that mining and holdings of bitcoin are highly concentrated.[15] This concentration may impact price movements in unpredictable ways. Investors have few resources to learn about and price these risks. And, large entities can create volatility and move the price of bitcoin through the exploitation of arbitrage opportunities among a small group of interconnected parties.[16] This concentration is ironic given that bitcoin was touted as the product to decentralize finance.

Lack of Unified Oversight
Among the reasons that crypto markets – including bitcoin spot markets – appear to be Petri dishes of fraudulent conduct is because there is little to no systemic oversight of these markets, nor other sufficient mechanisms in place for the detection and deterrence of fraud and manipulation. Spot trading of bitcoin is fragmented and scattered across different international trading venues, with many markets not subject to meaningful regulation. According to the Department of the Treasury, “[u]neven and often inadequate regulation and supervision internationally allow [virtual asset service providers] and illicit cyber actors to engage in regulatory arbitrage and expose the U.S. financial system to risk from jurisdictions where regulatory standards and enforcement are less robust.”[17] Additionally, even in the U.S., oversight of spot bitcoin markets is limited (at best).[18]

Evidence has shown that spot bitcoin trading underlying these products is so susceptible to manipulation, so rife with fraud, so subject to volatility, and so limited in oversight that we cannot credibly say that the proposed rule changes approved today were designed to prevent fraud and manipulation or that there are adequate investor protections in place. The Order does not meaningfully address or reconcile these critical issues. Rather, the Order “acknowledges these concerns,” and sidesteps them entirely stating (rather blithely) that the Commission does not apply a “cannot be manipulated’ standard.”[19] While that may be true, we also do not apply a “bury our heads in the sand” standard. The Order does not even begin to address these issues in the spot markets. Today’s analysis simply ignores important investor protection concerns.

In light of the above, it is no surprise that we have consistently disapproved proposed rule changes that would allow listing and trading spot bitcoin ETPs in the past. It has been the consistent and decided judgment of this Commission over the past five years that these products are unsafe and unfit for investors without the adequate guardrails in place. So, what has changed?

Read the full statement here.