SEC Approves Spot Bitcoin ETFs; CFTC Publishes DeFi Report; FINRA Addresses Crypto Assets; Reports provide data on crypto scams | BakerHostetler

SEC Order Approves Elf Spot Bitcoin ETFs for Trading

By Robert A. Musiala Jr.

On January 10, the US Securities and Exchange Commission (SEC) simultaneously approved eleven spot bitcoin exchange-traded funds (ETFs) on an accelerated basis, based on its order granting accelerated approval of proposed rule changes, as amended by amendments thereto, to listed and traded. Bitcoin-Based Commodity-Based Trust Shares and Trust Units (Exemption No. 34-99306) (Order). All eleven bitcoin ETFs began trading the next day, on January 11.

According to the Order, “After careful review, the [SEC] find that the [bitcoin ETF] Proposals are in accordance with the Exchange Act and rules and regulations thereunder applicable to a national securities exchange. Among other things, the order finds that the bitcoin ETF proposals met certain requirements under the Securities and Exchange Act of 1934 for the listing exchange to maintain rules “designed to prevent ‘fraudulent and manipulative acts and practices’ and, ‘ generally, to protect investors and the public interest'” and “to ensure the availability to brokers, dealers and investors of information relating to quotations for and transactions in securities.”

The Order finds that every exchange that wants to list a bitcoin ETF has a comprehensive surveillance sharing agreement with the CME via their common membership in the Intermarket Surveillance Group. It facilitates the sharing of information available to the CME through its oversight of … the CME bitcoin futures market. The order goes on to state that the results of an SEC analysis “confirm that the CME bitcoin futures market is consistently highly correlated with [a] subset of the spot bitcoin market over the past 2.5 years” which provides “empirical evidence supporting the … conclusion that prices generally move in close (though not perfect) alignment between the spot bitcoin market and the CME bitcoin futures market.” Based on these findings, the order concludes that “because the CME’s oversight may help detect that impact on CME bitcoin futures prices, the Exchanges’ comprehensive oversight sharing agreement with the CME can reasonably be expected to … will assist in monitoring for fraudulent and manipulative acts and practices in the specific context of the [bitcoin ETF] Suggestions.”

The order further finds that each bitcoin ETF proposal “sets out aspects of its proposed [Exchange Traded Product]including the availability of price information, transparency of portfolio holdings, and types of supervisory procedures, consistent with other spot commodities [Exchange Traded Products] that the [SEC] approved.” Accordingly, the order finds that the bitcoin ETF proposals are “reasonably designed to promote fair disclosure of information that may be necessary to appropriately price the shares of the Trusts, to prevent trading when a reasonable degree of transparency cannot be ensured not, to protect material non-public information relating to the Trusts’ portfolios, and to ensure fair and orderly markets for the shares of the Trusts.”

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Multiple SEC Commissioners Publish Statements on Bitcoin ETF Approval Order

By Robert A. Musiala Jr.

On January 10, following the publication of an order (Order) by the US Securities and Exchange Commission (SEC) approving eleven spot bitcoin exchange-traded funds (ETFs), several SEC commissioners published individual statements expressing their views on the Express command. A statement by SEC Chairman Gary Gensler noted that the SEC had previously rejected more than 20 bitcoin ETF applications, but “[c]however, circumstances have changed” after “The US Court of Appeals for the District of Columbia found that the Commission failed to adequately explain its reasoning in rejecting the listing and trading of a particular proposed ETF. According to Chairman Gensler’s statement, “[b]Due to these circumstances… the most sustainable way forward is to approve the listing and trading of these spot bitcoin ETP shares.”

SEC Commissioner Hester M. Peirce issued a statement in which he noted, among other things, that the Order “signals the end of an unnecessary, but consequential, saga” in which the SEC “wasted a decade of opportunities to to do our work.” According to the statement by Commissioner Peirce, “Had we applied the standard we use for other commodity-based ETPs, we could have approved these products years ago, but we refused to do so until a court called our bluff.” Commissioner Peirce’s statement also provides a discussion of “the many harms caused by the disparate treatment of mock bitcoin products.”

SEC Commissioner Mark T. Uyeda published a statement explaining, among other things, that while he “agrees[s] approving the spot bitcoin ETP applications” he has “strong concerns about three aspects of the order”: (1) The Order improperly seeks to validate the application of the “significant size” test to affect bitcoin ETPs see that through Judicial review; (2) The Order devises a novel, previously unarticulated standard to form the basis for approval; and (3) The Order obscures the SEC’s motivation for expediting the approval of the applications avoid a first-mover advantage among spot bitcoin ETPs.

Finally, SEC Commissioner Caroline A. Crenshaw published a statement dissenting from the Order. According to the statement by Commissioner Crenshaw, the order approving the bitcoin ETFs was “unsound and ahistorical” and “has set us on a wayward path that could further sacrifice investor protection.” Commissioner Crenshaw’s statement provides an analysis finding that the global spot markets underlying the bitcoin ETPs are distorted by fraud and manipulation, concentrated and without adequate oversight. Among other things, Commissioner Crenshaw’s statement criticizes and disagrees with the recent decision by the US Court of Appeals for the District of Columbia cited in the statement by Chairman Gensler, arguing that the Order does not appropriately serve the broader public interest. do not take into account

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CFTC Technology Advisory Committee publishes DeFi report

By Christopher Lamb

According to a recent press release by the Commodity Futures Trading Commission (CFTC), the CFTC’s Digital Assets and Blockchain Technology Subcommittee of the Technology Advisory Committee (TAC) recently issued a report on Decentralized Finance (DeFi), at the recommendation of the Department of the Treasury , to “engage further with industry to clarify how relevant laws and regulations apply to DeFi services, and take additional regulatory actions and publish further guidance informed by this engagement.” According to the report, DeFi presents “promising opportunities and complex, significant risks to the U.S. financial system, consumers, and national security.” The report indicates that the majority of DeFi systems are “neither fully decentralized nor centralized, but instead fit a multi-level spectrum of (de)centralization.” According to the press release, “a central concern related to DeFi systems is the lack of, and some industry designs to avoid, clear lines of responsibility and accountability.” The press release points out that this lack of responsibility and accountability makes it difficult for victims, defending against illegal exploitation and implementing necessary changes during crisis. The report provides detailed recommendations to mitigate risks in DeFi, including:

Resource assessment, data collection and threat mapping; Survey of the existing regulatory framework and whether frameworks need to be expanded to address additional risks; Risk identification, assessment and prioritization; Identifying and evaluating the range of potential policy responses to address risks; and fostering greater engagement and collaboration with local and international standard setters, regulatory efforts and DeFi builders.

Among other things, the report also recommends specific actions for anti-money laundering (AML) and digital identification in DeFi, including applying a holistic approach to regulate identity information, compliance and verification across different layers of the DeFi ecosystem, and determining of the level of identity information required for different financial actors.

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FINRA Adds Crypto Asset Section to Annual Regulatory Oversight Report

By Robert A. Musiala Jr.

On January 9, the Financial Industry Regulatory Authority (FINRA) published its 2024 FINRA Annual Regulatory Oversight Report. The report includes a new crypto-asset development section that discusses various regulatory and compliance risks and challenges that FINRA member firms “looking to engage in crypto-asset-related activities must identify and address.” The risks addressed by the new report section include, among others, “review and evaluation of their supervisory programs and controls, and compliance policies and procedures, in areas such as cyber security, AML compliance, communications with clients, manipulative trading, the conduct of due diligence on crypto-asset private placements and surveillance of their associated persons’ involvement in crypto-asset-related non-business activities (OBAs) and private security transactions (PSTs)” The new report section also provides details on “Surveillance Themes and Effective Practices” and provide links to related resources.

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Reports Provide Details About 2023 Crypto Scams

By Lauren Bass

According to a recent article by a self-styled “anti-scam solution” company, 2023 saw an increase in cryptocurrency phishing scams. Using one scam in particular – a type of malware called “Wallet Drainers” that can be deployed on websites to trick users into signing fraudulent transactions – malicious actors allegedly stole $295 million in assets from around 324,000 victims during 2023.

In related news, according to a recent study released by a blockchain analytics company, North Korean hackers allegedly stole $600 million in cryptocurrencies during 2023. Overall, malicious actors linked to the Democratic People’s Republic of Korea (DPRK) is, responsible for nearly 1/3 of all stolen crypto funds in 2023, and DPRK-linked hacks were “on average ten times as damaging as those not linked to North Korea.”

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