“Not a Great Precedent”: Commissioner Discusses the SEC’s Latest ETF Decision
When the SEC announced its rejection of the Winklevosses’ latest bitcoin ETF filing, the industry found itself reckoning with a problem on repeat: striving toward the goal of approval, another Exchange Traded Fund (ETF) proposal faced the SEC’s death knell.
At this point in the industry’s development, securing an ETF has become the space’s institutional albatross, the elusivity of which hangs over each successive rejection. The most recent filing was the Winklevosses’ second attempt to list a bitcoin-backed ETF, the first being shot down last year.
Earlier this year, some dozen ETF filings, like those by Van Eck Associates Corp., never even made it to the discussion table after the SEC withdrew the applications from consideration in January. Decisions for another five filings have been delayed until September. Lacking these approvals, the industry’s only institutional market offerings come in the form of the CBOE’s and CME’s futures contracts.
The market’s slow march toward establishing a bitcoin Exchange Traded Fund or Exchange Traded Product (ETP) has become a reminder that the space is still in the midst of growing pangs, and it’s an even more salient reminder that the wheels of regulation spin slowly — and not always in every industry’s favor.
SEC Commissioner Hester Peirce thinks these wheels should be turning a bit more quickly. Recently sworn into the commission after an appointment by President Trump, Peirce did not partake in the SEC’s 3-1 vote to strike down the latest proposal, but that hasn’t kept her from expressing her disagreement with the commission’s decision. She took to Twitter on the same day as the announcement, linking to her dissenting public statement.
In the following interview with Commissioner Peirce, Bitcoin Magazine delves further into her dissent, uncovering what the decision means for the future of regulation and what it will take for the SEC to give bitcoin ETFs/ETPs a nod of approval.
Bitcoin Magazine: What were the key factors that made you dissent to the SEC’s ruling and vote “yes” on the ETP?
Hestor Peirce: So, I didn't vote yes originally because I wasn't here — I got here six or seven months ago, and a lot of it happened at the staff level and they can get kicked up to the commission, which is what happened here. What made me vote against what the commission did? There were three things playing into that.
One, I disagree with how they read our statutory mandate. The way I read our mandate, we should have approved this one because we really shouldn’t have been looking to the underlying markets the way that we did in the order that they put out last week.
Second issue, I do think that institutionalization in this space would address some of the concerns they lay out in their order.
And the third thing, I think that, historically, the SEC has not been great on innovation, on welcoming innovation, and for me, this order perpetuated my concerns in this regard. We need to have a willingness to welcome new approaches and I’m worried that if we keep sending the message that we’re not open to hearing from people who have new ways of doing things, then people will say we’re going to take our business to another country.
BM: In your dissent, you talk about the SEC playing gatekeeper to the bitcoin market. Is this decision setting a disconcerting precedent, giving the SEC the power to deem what should and shouldn’t be considered an asset, or have we seen this kind of behavior before?
HP: I actually think that it’s not only happened in this context, but that it’s happened with prior orders as well; however, in those cases, they were approved. But even in the past, we’ve looked to underlying commodities markets, and I think that walks us down a road that we don’t want to go down and we can’t go down.
You know, in this particular case, there’s a lot being said about bitcoin. It is a new type of asset, and I think that that played into the decision that was ultimately made. I’m worried that, by looking through to underlying markets, we’ve opened a can of worms that we don’t want to open up, where we’d have to assess underlying markets for all of these different types of assets.
I do think it’s not a great precedent. It plays into a bit of a thread in securities regulations — at the federal and at the state level — which is that there’s an inclination among regulators to almost step into the shoes of the investor and say whether or not the investor should be making that particular decision, based on our assessment of the actual product — in this case, the actual asset. So yes, that is a disturbing precedent, because I can’t make assessments about those things.
There are lots of people spending lots of time thinking about this new asset class and they should be able to make decisions about it. I can‘t stand in their shoes and say, “I can see the future better than you can see the future, I can assess where this is going better than you can assess where this is going.”
So yes, I’m very worried about the SEC putting itself in the shoes of investors, which is what it was doing here. Because frankly if this product comes to market, investors might decide, “We’re just not interested in it.”
There are lots of things that investors are going to look at when they look at an ETP — there are other products out there and they are different. There are different characteristics, so let’s put it out there. As long as the disclosure is good and as long as the exchange can manage the trading of the product, let’s put it out there and let’s let investors vote up or down based on whether or not they buy it.
BM: To what extent does the SEC decision show a lack of trust in such self-regulatory bodies, at least for this industry?
HP: Well, I mean, I think it does show a bit of a lack of trust for our existing SROs, meaning the exchanges. In my case, I’d say, look, the exchange has thought about the product it wants to list, so if it’s gone through that thought process and addressed our concerns about how the product will trade, then it’s done its job, so we can let it go forward.
In terms of the bitcoin market generally, my concern with the order’s approach is that it says, “Look, these markets aren’t regulated.” To some extent that’s true, but there are some of them that are regulated by governments; the Gemini exchange is regulated at the state level.
But the point that often gets lost in these discussions about regulations is that there’s actually a lot of self-regulation, not in the formal SRO context, but I’ve listened to a lot of discussions between factions in the crypto world and they’re criticizing each other, sometimes very openly and very harshly, and they’re calling each other out for things.
That kind of healthy, transparent, private regulation is relevant to the discussion because, to the extent that someone is going to engage in manipulation in a market, other players in that market — whether its gold or cryptocurrency — other players in that market will care about that because it will affect them. So there is some sort of a natural push to have regulation that grows organically within a marketplace.
I think the order did not give enough attention to the fact that, especially when you bring institutions into a market like this, there’s going to be a pressure to privately monitor each other. It’s not self-regulation so much as you’re watching what your competitors are doing.
BM: Not so much self-regulation as self-preservation, in some ways.
HP: In some ways, right.
BM: It’s a bit of a catch-22, isn’t it? The SEC is essentially saying, “The market isn’t regulated enough, so we can’t start regulating it.”
HP: Yes. You know, to one degree, there is a bit of logic to that. I had that same reaction as you had. The counterpoint I would offer is that we’ve got futures markets, so those markets are still relatively new, so as those markets develop, you’ll see more institutionalization and more regulation.
So there are different avenues through which you can arrive at regulation, but that’s part of what I was trying to get at with the institutionalization qualm of my dissent: If you really want this market to be more orderly, then you’ve got to let some of these forces in that are going to bring order to it.
[Here’s] another interesting point: I think some of the people in the Bitcoin community would not welcome an ETP because that’s precisely the point of why they wanted this decentralized financial system, [one] that did not involve traditional players in the financial market.
BM: The SEC has, understandably, been leading efforts to regulate the crypto industry. Are there other federal departments and agencies that you believe could be picking up some slack to give the industry some clarity regarding legislation?
HP: The problem is that we each have our own regulatory jurisdiction, and so for something like an ETP, we’re the only game in town. You know, that’s not totally true because you could go to a different country as some folks have done. But if you’re talking about in the U.S., outside of the ETPs, people are thinking about ICOs. [ICOs are] something we have to address, whether or not something’s a security.
So I think we really do have a role to play, but on the positive side — you know, I’ve been fairly negative about where the SEC has been on some of this stuff — but on the positive side, we do have Valerie Szczepanik who is focusing on cryptocurrency issues in the division of corporation finance. She is someone who is quite knowledgeable. From people I’ve talked to outside of the agency who work in the crypto space, they’re quite comfortable with her as the top staff regulator in this space because she is quite knowledgeable. I do think that there is a positive trend going on here, as well.
That said, I think your point is a good one, as there are other regulators that are looking at this space more generally. There’s the CFTC, there’s the Consumer Financial Protection Bureau’s sandbox. There are different ways, and I think part of what we’re going to have to do is work with our fellow regulators because part of the problem is that it’s not clear which regulatory box things fit in. I think there needs to be more cross agency work so that we can encourage each other through that process.
Look, some of these technologies are here to stay and we’re going to have to figure out how to build a regulatory framework or build on our existing regulatory framework to make sure that these products and the people designing them and the people who are thinking about possible use cases can come and get guidance on how they can operate within legal parameters.
BM: In your dissent, you write that “the order analyzes the ETPs through a legal and regulatory framework derived from prior approval orders for commodities with very different characteristics.” In your opinion, does bitcoin and the wider crypto market that it’s spawned deserve their own regulatory guidelines? Do we need to write a new playbook for a new market?
HP: Is it an asset class that we need to design a new regulatory framework for? Maybe, but maybe that’s not the best approach. To the extent that something is being offered and is actually a security then we should probably regulate it as such.
The questions that people have now are “How long is it a security?” and “How do we trade these in a way that is in line with securities laws?” I tend to think — and I’m open to being convinced otherwise — but I tend to think that the right approach is to work with our existing securities law framework. To the extent that something is a commodity, work with our commodities law framework and to see whether there are areas where we need to provide guidance or update our rules to accommodate any difference.
BM: It’s something that a lot of us in the space juggle around with because we get frustrated when we see what appear to be antiquated guidelines imposing rules on something that is completely new. And there are certain areas where it is a little more cut and dried with securities.
HP: To that point, to the extent that there are specific guidelines that you all are running up against that are proving problematic to engaging in legitimate activity, I’d like to hear about those. Because it’s often talked about in these broad strokes.
I’d like to know: What are the particular issues you’re running up against that are giving concern to you? That’s really helpful because we can think about areas where we may need to update our rules or issue guidance to make it work.
BM: In the dissent, you write “when we do finally approve an ETP on bitcoin...” You didn’t say if. Do you believe this is inevitable?
HP: [Laughing] I’m a bit optimistic.
BM: Perhaps not inevitable but probable?
HP: Well, the reason that I anticipate that it’s probable is because there’s a lot of investor demand. And I think at some point that that will help push the agency. When that point will come, I can’t speculate on.
BM: Do you think that surveillance-sharing agreements are going to be a large part of this?
HP: Well, the order did focus on surveillance-sharing agreements as something that it was looking at, though I don’t know if the order’s authors would say that that’s the only approach for approval.
We consider each of these on the facts and circumstances, and that is how it should be. So I’m not speculating on any particular product, but I do think that there is interest in this area and I’m hopeful that, ultimately, we’ll be able to get there with an approval.