The SEC’s Bumbling Bitcoin ETF Rollout Was Perfectly On-Brand

Hacks and communication failures were the only appropriate ending to the regulators’ many years of wrongheaded misbehavior.

Late Wednesday saw the long-anticipated launch of exchange-traded funds that will let investors buy custodied Bitcoin (BTC) through brokerages and other conventional asset management channels. The approval of the ETF came only at the end of a bitter fight against it by the SEC, led by Chairman Gary Gensler. The approval now comes effectively at court order, following the SEC’s decisive loss of a court case brought by Grayscale, in which the judge declared that the agency had been “arbitrary and capricious” in its denial of Grayscale’s ETF application.

The SEC’s ultimate acquiescence to the U.S. justice system came with a few final, pouty screwups. They were almost certainly accidental, but reflected the agency’s years of bullheaded misbehavior all too poetically.

First, on Tuesday, the SEC’s Twitter/X account was hacked, and the hacker posted a premature announcement of the ETF’s approval, which was then quickly withdrawn. This triggered a market sell-off that sent Bitcoin down 2%. Then, on Tuesday afternoon, the agency posted an announcement of the ETF approval to its website … which then promptly disappeared, replaced for many users by a 404 error message on the SEC’s website. It was widely speculated the SEC accidentally posted the approval before market close, then again reversed themselves. Again, brief market turmoil was the result.

Market Manipulators?

There is no way to overstate the richness of the irony here: the agency that has fought tooth and nail against the mainstreaming of a digital-native technology isn’t digitally savvy enough to implement two-factor authentication on one of its most crucial communication channels, or to competently manage incredibly market-sensitive information flows through its website. Both technologies that are decades old.

And regardless of intent, these flubs amounted to exactly the kind of investor-harming “market manipulation” that had partly justified the SEC’s denials in the first place. Gensler and his team came off yet again like recalcitrant toddlers, performatively flopping on the ground in passive resistance to a parent’s command; or like a husband pretending not to know how a vacuum cleaner works when asked to do the chores. 

This digital bumbling reflects the much deeper set of conceptual shortcomings that have driven regulatory resistance to the Bitcoin ETF, and to digital assets more broadly. The deep incoherence of its position has led the SEC itself to behave manipulatively and dishonestly, including standing up the non-operational Potemkin startup Prometheum to advocate for its policy positions before Congress; and presenting what a Federal judge called “false and misleading” evidence in its efforts to freeze a crypto company’s assets. Following the ETF approval, SEC Commissioner Hester Pierce, a longtime advocate for the ETF, issued a searing condemnation of the agency’s years worth of damaging misbehavior and dishonesty on the matter.

Merit Neutral?

There are endless pages to be written about the straightforwardly, objectively wrong understandings that have forced the SEC to undertake such duplicitous tactics. But one small window into the flimsy conceptual basis for their resistance was provided by Gensler himself, in a baffling note issued after the ETF’s approval. Gensler wrote in part that the SEC is “merit neutral” on the underlying assets in ETFs, a howlingly laughable claim given their behavior. More tellingly, though, Gensler notes that “the underlying assets in the metals ETPs [Exchange-Traded Products] have consumer and industrial uses, while in contrast bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity”.

When Gensler refers here to “metals ETPs,” he’s including gold ETFs — a product, first approved in 2004 — that decisively undermines Gensler’s objections to the Bitcoin ETF. Gold does have industrial use, but industrial demand for gold is nowhere near the most important factor in its price. Rather, gold is substantially an instrument of hedging and speculation, its dynamics driven by a shifting conceptual consensus that sees it as a bulwark against the erosion of the paper money economy.

And my god, if you don’t think gold bullion is used for illicit activity, you should get to know a guy named Senator Robert Menendez.

Moreover, Bitcoin, while definitely “speculative,” has not only clear and unambiguous real users, but real signs of long-term user growth, facts that must drive Gensler and company absolutely batty. In 2023, Bitcoin moved more money than Visa, and the demand for network capacity drives the price of the network’s token. So investing in Bitcoin is a bet on real supply of and demand for blockspace, nothing more complicated than a bet that the growth of transaction volume will continue. In fact, it’s not hard to argue that this is more true for BTC than it is for gold, since gold is not a new technology with major potential for adoption growth.

Good or Harm?

The disgraceful intellectual dishonesty and procedural ineptitude displayed by the SEC in the years since Gensler took over — including utterly fumbling their begrudging approval — have arguably been damaging for crypto. But I think that on balance, they have been more beneficial than harmful for the space. By positioning itself as a clear villain and irrational bad actor, the SEC has galvanized crypto community sentiment, despite justified anxiety over whether a Bitcoin ETF is actually in line with the ideals many of us brought to the space.

Rather than harming crypto, Gary Gensler has instead inflicted long-term damage to his own credibility. When he was first appointed, there was broad discussion of Gensler’s political ambitions. Specifically, there were rumors his endgame was to become Treasury Secretary. After suffering an unparalleled string of court defeats — and acutely embarrassing defeats at that — Gensler’s career goals may need reassessment.

That’s sad for Gary. But the damage done to the credibility of the SEC itself is ultimately harmful to every American. While it’s true that a certain segment of crypto ideologues remain flatly opposed to regulation per se, many more have come around to the idea that sensible regulation benefits everyone in a marketplace. But sensible regulation requires a sensible regulator, not one that has good sense imposed on it by the courts, over its own whining, fitful, irrational objections.

David Z. Morris, PhD., is the founder of Dark Markets, a newsletter and podcast focused on illicit finance, investment fraud, and cryptocurrency. He is a former reporter for Fortune and former lead columnist for CoinDesk, where he helped expose frauds including Do Kwon and Sam Bankman-Fried. He is the author of Bitcoin is Magic, an introduction to the long-term social impacts of blockchain networks. He holds a doctorate in the history of technology from the University of Iowa.