The Digital Chamber Continues its Efforts to Shine a Light on the SEC’s Unfair Practices Towards the Digital Asset Industry
For over a decade, the SEC has imposed shifting, inconsistent, and often baseless regulatory roadblocks against digital asset innovation. Time and again, its actions have been driven not by clear legal standards but by subjective policy preferences, effectively acting as a merit regulator rather than an impartial enforcer of the law.
Its resistance to digital assets has been met with mounting legal challenges, growing frustration from market participants, and, ultimately, a historic course correction, but only after investors were forced to miss out on significant opportunities.
The Crypto Conundrum: A History of Unfair Bitcoin ETF Denials
In 2022, The Digital Chamber published The Crypto Conundrum: Why Won’t the SEC Approve a Bitcoin ETF?, detailing how the SEC’s Division of Trading and Markets consistently denied applications for exchange-traded funds (ETFs) that applications that had sought to allow the listing and trading of exchange-traded funds (ETFs) that directly held bitcoin.
The Crypto Conundrum argued that the continual denials were based not on objective and dispassionate application of law and precedent, but rather on policy judgments made by the SEC’s staff regarding digital assets. Put more concisely, the agency wasn’t just enforcing regulations: it was acting as a merit regulator, arbitrarily picking winners and losers in the marketplace.
This position was resoundingly vindicated less than a year after the publication of The Crypto Conundrum when the D.C. Circuit Court of Appeals unanimously decided that the SEC’s denial of a Bitcoin ETF application constituted “arbitrary and capricious” behavior and a violation of the Administrative Procedures Act.
The result? The opinion paved the way for the approval of eleven Bitcoin ETFs in 2024 in what would turn out to be the most successful ETF launch in history.
Beyond Merit: The SEC’s Investment Management Division and Digital Assets
While The Crypto Conundrum focused on the SEC’s Division of Trading and Markets, TDC’s latest report, Beyond Merit: How the SEC’s Division of Investment Management Blocked Permissible Investments in Digital Assets, shifts the spotlight to the Division of Investment Management, the division responsible for regulating investment companies and advisors.
Based on interviews with numerous issuers, this report details the vast lengths to which the Division of Investment Management has gone to prevent registered investment companies from providing meaningful exposure to bitcoin and other digital assets. Instead of following clear legal guidance, the SEC imposed constantly shifting standards with no basis in rule, statute, or law: Once again, acting as a merit regulator rather than an unbiased enforcer.
This isn’t a story about any one administration or SEC chair. The report explicitly rejects any notion that the SEC’s inappropriate treatment of digital assets can be laid at the feet of a particular political party, administration, or individual.
Dating back nearly a decade, the first anecdote recounted in this report occurred in 2015 when Barack Obama was President and Mary Jo White was the SEC Chair. The Dalia Blass Letter cited in the report was issued during Jay Clayton’s term as SEC Chair during Donald Trump’s first administration, and it was the Gary Gensler-led SEC that unsuccessfully litigated seeking to prevent the issuance of Bitcoin ETFs.
This is a story of how the Division of Investment Management, over nearly a decade, has consistently operated beyond its mandate. It is not the actions of any one individual, but a pattern of regulatory overreach embedded within the division itself.
Why it Matters
In recent years, the SEC has increasingly faced accusations that it has been wandering into the “unbounded, dangerous territory of merit regulation,” as SEC Chairman Hester Peirce artfully described in 2020, and is one of the most common refrains heard by TDC members.
Accordingly, TDC set out to chronicle and highlight such instances with the hope that shining a light on such behavior might encourage the SEC to return to the authorized path on which it was initially set.
The report made the problem clear: The agency overstepped its mandate—as it relates to a registered investment company’s exposure to digital assets. The SEC had never encountered an asset quite like bitcoin before—one that is purely digital in nature—and perhaps feared that the average investor was swept up in a speculative fever over an asset class lacking a clear investment rationale. As the agency sought to indulge its impulse to save investors from themselves, it found very few tools at its disposal to effectuate its aims. This was by design, as seeking to save investors from themselves, is explicitly not what Congress intended for the SEC when it created the agency. Congress had considered and actively pivoted away from merit-based regulation.
In its efforts to limit exposure to bitcoin and digital assets, the SEC took positions that lacked legal justification, fueling widespread disillusionment and accusations of regulatory bias. Yet, despite the agency’s attempts to stifle the market, bitcoin’s adoption and value only grew. In trying to “protect” investors, the SEC instead deprived them of missing out on the large gains such investors would have otherwise experienced.
Time for Change
As we enter 2025 and with the SEC set to enter a new chapter in its history, our report seeks to play a very small part in encouraging the SEC to return to the authorized path on which it was initially set. There will always be a new asset or company that inspires wonder on the part of investors and skepticism on the part of the SEC. It is our hope the SEC will learn from its experience with digital assets, and in the future, resist the siren song of merit regulation.