SEC Approves Exchange Listing Applications for Spot Bitcoin ETPs

By:  Robert E. Plaze, John Mahon, Shaina Maldonado & Adrianna Vallee (Blockchain & The Law)

On January 10, 2024, the Securities and Exchange Commission (“SEC”) issued an order granting approval for the applications of 11 spot Bitcoin exchange-traded products (the “Approved ETPs”) to list and trade their shares on a national securities exchange.[1] Consequently, each Approved ETP is slated to commence trading on either the NYSE Arca, Inc., The Nasdaq Stock Market LLC, or Cboe BZX Exchange, Inc. This SEC Order marks the first instance where the SEC has authorized the listing of an exchange-traded product (“ETP”) directly investing in a cryptocurrency, specifically Bitcoin (“spot crypto ETPs”).

Background

The order signifies a significant milestone for both asset managers and the crypto industry. Prior to the SEC Order, the only cryptocurrency-related ETPs permitted by the SEC for trading on national securities exchanges were those primarily investing in cryptocurrency-derived futures (“crypto futures ETPs”), rather than cryptocurrencies acquired directly from the spot market. Mutual funds and exchange-traded funds (“ETFs”) faced similar limitations.[2]

In rejecting previous listing applications for spot crypto ETPs, the SEC cited concerns regarding whether the rules of the exchanges where such ETPs were proposed to be listed were adequately designed to prevent fraudulent and manipulative activities, as mandated by the Securities Exchange Act of 1934 (the “Exchange Act”). Spot crypto ETPs sought to address this requirement by claiming that the exchange in question maintained a comprehensive surveillance-sharing agreement with a “regulated market of significant size” related to the underlying cryptocurrency assets, typically referring to the Chicago Mercantile Exchange’s (“CME”) Bitcoin futures market for spot Bitcoin ETPs. The SEC dismissed these assertions, stating that applicants failed to demonstrate that the CME met the criteria of being a regulated market of sufficient size for these purposes, known as the “significant market test.”

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