Elusive Bitcoin ETF: Hester Perice criticizes lack of legal clarity for crypto

Elusive Bitcoin ETF: Hester Perice criticizes lack of legal clarity for crypto

Although the crypto sector is maturing, regulatory clarity regarding digital assets remains cumbersome.

This was highlighted recently by Commissioner Hester Perce, also known as the United States Securities and Exchange Commission (SEC) “crypto mother”, in remarks she made at the “Regulatory Transparency Project Conference on Regulation the New Crypto Ecosystem. Necessary Regulation of Crippling Future Innovation?”

Peirce started her speech by emphasizing how important it was to “regulate the new crypto ecosystem”. However, Peirce also pointed out that the industry is still looking for an actual regulator. She stated:

“A bipartisan bill was announced last week to address this question. Many in the crypto industry celebrate the fact that certain powers have been allocated to the Commodity Futures Trading Commission, (CFTC), instead of the Securities and Exchange Commission. This is likely due to the disappointment that the SEC hasn’t used more of the authority it has to regulate crypto sensibly.

Everybody asks me when the spot bitcoin ETP approval will occur. Here’s my answer: https://t.co/25M5kCDF1Q
— Hester Peirce (@HesterPeirce), June 15, 2022

Peirce noted this and said that she was “hopeful” that the Commission would change its course and make use of any potential authorities. However, Peirce quickly pointed out that her criticisms regarding topics like the denial to Bitcoin (BTC), exchange-traded product (ETP), are directed at the SEC Commission and not the staff. She noted that “the staff is following the Commission’s lead and the Commission hasn’t been leading well.”

Crypto industry regulatory matters

Although a variety of bills related to digital assets were passed this year, Peirce focused her speech on the approval of a spot Bitcoin ETP within the United States. She mentioned that this is the most frequently asked question. Spot ETPs have been successful in other countries, including Canada and Europe. The Canadian spot ETP saw 1 billion Canadian Dollars in assets under management one month after it launched in 2022. However, the SEC continues to oppose this offering.

Peirce stated that she “has no idea” when that would happen. She also noted that while she is conscious of the Commission’s resistance, she pointed out that they have “determined to subject any related to Bitcoin.”

While the U.S. crypto industry continues to grow, experts in the field are still unsure if a spot Bitcoin ETP is going to be approved. A Bloomberg analyst and Eric Balchunas, an exchange-traded funds (EFT), recently stated that a spot ETF could be created in the middle of 2023 if crypto platforms are included within the regulatory framework of SEC.

The bipartisan crypto bill, also known by the “Responsible Financial Innovation Act”, was introduced in the United States Senate June 7, 2022. However, it is not clear if the SEC and CFTC will be responsible to allocate digital assets.

Grayscale Investments, a digital asset management firm, continues to be a strong opponent of a spot Bitcoin ETP. Grayscale CEO Michael Sonnenshein recently stated that Grayscale is preparing for a legal battle if Grayscale’s Bitcoin spot ETF gets denied by the SEC.

Grayscale, an ex-U.S. Attorney General, hired Donald B. Verrilli shortly after the disclosure. To push for a Bitcoin spot ETF, Grayscale hired Donald B. Verrilli, a former U.S. Solicitor General. Verrilli spoke out at Consensus 2022 about his plans for convincing the SEC that Grayscale’s Bitcoin Trust be converted into a spot-based ETF.

Verrilli stated that the SEC approved a Bitcoin futures ETF. This was consistent with U.S. Security Laws. It demonstrated that there wasn’t significant fraud or manipulation. Verrilli feels that this has created an environment where a Bitcoin spot ETF approval should be treated in the same way as a futures ETF. He stated:

The Administrative Procedure Act, a federal statute, regulates all federal agencies including the SEC’s conduct. It outlines the procedures that agencies must follow. The most important rule is that agencies must not be ‘arbitrary or capricious’ in their handling of similar cases. This is why it is difficult to approve a spot ETF.

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Peirce also explained that futures-based Bitcoin ETFs were allowed to trade in October 2021 by the SEC.

Chair Gary Gensler clearly signaled that he would allow the change. He cited the 1940 Act protections and the CFTC’s oversight over futures markets as key reasons for his confidence in such products. These funds were popular but there is still demand for spot-based products. Futures products are more difficult to manage and may not be as closely tracked by the spot price.

Peirce provided more details about the importance of a spot ETP. She noted that this product could allow retail investors to get exposure to Bitcoin via a securities product that, due to the effective ETF arbitration mechanisms, likely would track spot Bitcoin’s price closely.” She also stated that it would likely to be cost-effective to manage the fund while being “conveniently” in an investor’s brokerage account.

Not only has the approval of a Bitcoin spot exchange-traded fund (ETP), but also regulatory clarity surrounding stablecoins is more important than ever. Due to the recent fall of Terra’s ecosystem, this has been made more important. Cointelegraph spoke with Senator Pat Toomey who is the top ranking member of Senate Banking Committee. He said that the Terra collapse has an impact on legislation because it serves as a wake-up call for the federal government.

“My view is that algorithmic and fiat-asset backed stabilitycoins should be treated differently. He said that they are completely different. Toomey said that asset-backed stablecoins do not have a regulatory framework. He believes it is vital to establish this regulatory regime, noting that traditional instruments such as cash and securities can be used to back stablecoins.

Toomey has recently created a regulatory framework for stablecoins. It is known as the Stablecoin Transparency of Reserves and Uniform Safe Transactions Act (or TRUST Act). This framework proposes that digital assets are identified as “payment stabilitycoins,” which is a digital currency that can be converted into fiat and used as a medium for exchange. Toomey suggested that stablecoin regulation may be possible at the end 2022, despite the TRUST Act still being a framework.

Kevin O’Leary, a venture capitalist and chairman of O’Leary Ventures, spoke to Cointelegraph about this. He said that although the bipartisan bill by Senators Cynthia Lummis (Wyoming) and Kirsten Gillibrand (New York) addresses stablecoin regulation and that the bipartisan bill by senators Cynthia Lummis and Kirsten Gillibrand is important, he believes that Toomey’s frameworks, together with the Stablecoin transparency ACT sponsored and sponsored by Senator Bill Hagerty will likely to pass first.

Both of these refer to stablecoins only. These regulations suggest that stablecoins must be audited every 30-days and that assets within these tokens cannot remain there for more than 12 months.

O’Leary says this is a money market strategy. O’Leary said that Circle’s USD Coin stablecoin (USDC), has not broken its U.S. Dollar peg despite recent crypto market volatility, and the Terra collapse. “It is much more promising to have something 100% backed by the U.S. Dollar than it is to have something algorithmically backed today.”

Enforcement actions can be used to shorten the regulatory process

Peirce stated that the SEC Commission needs to take a more productive route to regulation because of the lack of clarity in the crypto industry. She stated that the Commission’s refusal to approve a spot Bitcoin ETP was in keeping with its general reluctance of building a regulatory framework for cryptocurrency using standard regulatory processes.

Peirce stated that the SEC had “cobbled together regulatory framework through enforcement actions.” He also cited the BlockFi settlement and SEC settlement, which took place in February 2022.

She pointed out that BlockFi was able to register under Section 63 of the Securities Act. This could, if it is successful, be the standard for regulation of crypto lending. Peirce acknowledged that the SEC had made a mistake. She suggested that it would be better to identify crypto lending as violating securities laws, and then invite lenders and others to the table to discuss a possible path forward.

Toomey also stated that SEC Chair Gensler had been “pushing boundaries of authority”, mentioning this last week at Consensus2022’s press conference:

“I think he also claimed that almost all crypto assets were securities, without explaining why. This is absurd because it raises concerns about enforcement actions without anyone fully understanding the consequences. Regulating by enforcement is a horrible approach.

Optimism for Change

Peirce’s speech was notable given crypto’s regulatory environment. She stated that she is optimistic that the course can be changed, and that both investors as well as the SEC must take a proactive approach.

While this “approach”, is still a bit vague, there are some examples of how it might look. O’Leary stated that WonderFi Technologies (a decentralized finance platform) will be the first Canadian-regulated digital asset exchange listed on the Toronto Stock Exchange.

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He stated that although TSX had never previously listed a cryptocurrency exchange, they invited WonderFi to do so because they are fully compliant with the regulations and because there is institutional interest. O’Leary said that cryptocurrencies would be the 12th sector in the S&P 500 within the next decade due to the potential benefits of digital assets, including reducing high fees and increasing financial services in different economic sectors.

The listing of WonderFi on TSX is crucial for U.S regulators. It shows how investors can collaborate with regulators to make progress in the industry. O’Leary mentioned that G7 regulators meet daily and that the SEC sees Canada’s advancements as potential use cases for the United States.

“Ontario regulators allowed the first Bitcoin/Ethernet ETF. The Ontario Securities Commission would not have approved this if the SEC had not approved it. These products are being regulated by the Ontario Securities Commission, which is showing other jurisdictions how they can be issued.”

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