The Elad Effect: How the SEC’s New Commissioner Changes Things for Bitcoin ETFs

SEC nominee Elad Roisman at a July 24th hearing before the Senate Banking Committee

Elad Roisman, a Republican from Maine, will become the fourth Trump appointment to the Securities Exchange Commission later today when the Senate votes to confirm him. In a hearing before the Senate Banking Committee in July, Roisman touched on what will be a series of landmark decisions on cryptocurrency made by the Commission, saying:

“…the SEC must examine and re-examine its rules, regulations and guidelines to ensure that they are still working as intended to accomplish the SEC’s mission. This is most recently manifested in areas such as data protection and cybersecurity, as well as the emergence of new investments and technologies such as initial coin offerings and blockchain. It is essential that the SEC approach these new challenges in a fair and transparent manner, provide clarity and certainty to the markets and investors, and enforce the laws and regulations that hold market participants accountable.”

In tradition with nominees before him, Roisman has mostly kept his own ideology close to the vest throughout the Senate confirmation process. With a little research, though, we can get some idea of where the incoming Commissioner might stand when it comes to the proposed Bitcoin ETFs. First, though, it’s important to look at the likely makeup of the SEC at the time the decisions are made.

Roisman is Trump’s second Republican appointment to the Commission and fourth appointment overall. The Trump SEC thus far is comprised of:

Chairman — Jay Clayton (I)

Commissioner — Robert Jackson, Jr. (D)

Commissioner — Hester Peirce (R)

Commissioner — Elad Roisman (R)

Although Chairman Clayton is officially listed as an Independent, he was appointed by a Republican and for all intents and purposes he is a Republican. The fifth Commissioner and last holdover from the Obama administration, Kara Stein, can’t serve past December. It’s been rumored Trump will nominate Democrat Allison Lee to replace Stein, but as of writing no nomination has been made. With Senate Democrats already on board for Roisman’s confirmation, however, Trump has little incentive to nominate a Democratic replacement for Stein at all. Conceivably the President could forego making another nomination, leaving a four-member Commission with a de-facto 3–1 Republican majority.

There’s no timetable for a decision on the recently announced reviews of three futures-based Bitcoin ETFs, but recent examples like the Winklevoss review, which took sixteen months, suggest a decision is unlikely before the end of the year. The much anticipated physical Bitcoin ETF, SolidX/VanEck, is due for a decision by early March. Decisions on all the Bitcoin ETFs could be issued at any time, but most likely they’ll come sometime after Commissioner Stein steps down in December.

The SEC has permanently delegated initial ETF decisions to the Division of Trading and Markets in order to clear the regulatory logjam created by an increasing number of applications. While the SolidX decision will be made by the Division, the opinions of the Commissioners will most certainly be a factor. Specifically the Division will consider the likelihood that the Commission initiates a review of their decision, and in such a review, how the commissioners would vote. Denying SolidX for the same reasons previous Bitcoin ETFs were denied — lack of regulation and perceived manipulation in the underlying Bitcoin market — would almost certainly result in another review and defeat the purpose of delegating decision in the first place. For that reason the initial SolidX decision should closely mirror the opinions of the seated Commissioners.

Roisman’s addition to the SEC, along with Stein’s departure, change Commission dynamics considerably. The Winklevoss review was voted on by Chairman Clayton, two Democrats and a Republican, resulting in a 3–1 denial. By contrast, Chairman Clayton, two Republicans and a Democrat might provide a very different result, especially when deciding on a stronger proposal like SolidX.

Robert Jackson, Jr. (D) — Disapprove

Publicly Jackson has shown little support for a Bitcoin ETF or cryptocurrency in general. He voted against approving Winklevoss in the SEC’s review, and will likely oppose SolidX as well.

Hester Peirce (R) — Approve

Commissioner Peirce is a proponent of economic freedom and limited regulatory oversight. Prior to being appointed Commissioner she served as counsel to SEC Commissioner Paul Atkins from 2004–2008. She left the SEC in 2008 to serve as Senior Counsel to the Senate Banking Committee under Senator Richard Shelby. There she was involved in the implementation of the Dodd-Frank Act and oversaw financial regulatory reform efforts following the 2008 financial crisis. Her 2012 book “Dodd-Frank, What It Does and Why It’s Flawed” draws from her experience as Senate Banking Counsel.

Peirce was the lone dissent in the appeal of the Winklevoss denial. Her dissent was thorough, well-researched, eloquent and fair. Her position is not so much pro-Bitcoin or pro-crypto as it is in favor of limiting the SEC to its duty as laid out in the Securities Exchange Act of 1934. In her dissent, she argued:

“Approval of this order would demonstrate our commitment to acting within the scope of our limited role in regulating the securities markets. The Commission’s mission historically has been, and should continue to be, to ensure that investors have the information they need to make intelligent investment decisions and that the rules of the exchange are designed to provide transparency and prevent manipulation as market participants interact with each other.”

Commissioner Peirce will favor approving SolidX for the same reasons she voted to approve Winklevoss.

Elad Roisman (R) — Approve

Roisman’s pedigree is notably similar to that of Commissioner Peirce. He currently serves as Chief Counsel to the Senate Banking Committee under Senator Mike Crapo. Roisman, like Peirce, spent much of his time at Senate Banking on Dodd-Frank, specifically on drafting legislation aimed at rolling back Dodd-Frank regulations. Also like Peirce, prior to serving Senate Banking, Roisman served as Counsel to an SEC Commissioner, Daniel Gallagher. Coincidentally Gallagher is a known advocate for fintech innovation, and when he left the SEC in 2016 he joined the Board of Blockchain company Symbiont.

While Roisman hasn’t specifically commented on how he might vote on a Bitcoin ETF, he’s cast in the same mold as Commissioner Peirce, both in experience and ideologically when it comes to the role of the SEC. Roisman told Senate Banking in July:

“There’s a perception that the markets are rigged against the little guy and I think it’s important for the SEC to try to dispel that notion.”

Commissioner Roisman, alongside Commissioner Peirce, will favor approving SolidX.

Jay Clayton (I) — Approve

Chairman Clayton issued a statement in December on cryptocurrencies and ICOs, in which he said:

“We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing. I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike. I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so.”

Chairman Clayton has taken a measured, cautious, fair approach to regulating cryptocurrency. His priorities genuinely seem to be fostering innovation and providing the investor protection the SEC is responsible for.

In the Winklevoss appeal, because the Commission was made up of himself, two Democrats and a Republican, Clayton had little choice but to disapprove. Had he sided with Pierce for approval, the review would have ended in a 2–2 tie and regulatory gridlock. As Chairman, it’s very unlikely he votes into a gridlock situation. Issues become more political, Commissioners are more likely to vote along party lines, rulemaking agendas become stalled, and the job of Chairman is generally made significantly more difficult.

Siding with the majority denied the Winklevoss appeal, but averted regulatory gridlock, with the knowledge that a much stronger proposal in SolidX was around the corner.

When SolidX is decided, Republicans Peirce and Roisman favoring approval puts Chairman Clayton in the opposite position he was in for Winklevoss. If he opposes approval and sides with Jackson — regulatory gridlock. If he sides with his fellow Republicans, we have approval of a physical Bitcoin ETF. This is how I believe SolidX gets approved.

With Roisman aboard and a 3–1 Republican majority, SolidX will either be approved by the Division of Trading and Markets sometime before March, or it will initially be denied before the Commission initiates a review like they did with the recent futures-based ETF decisions. Ultimately the review will be put to a vote, ending with a 3–1 decision to approve.

As enthusiastic as the crypto community became over the summer with the prospect of a Bitcoin ETF being approved, the Winklevoss denial seemingly came out of nowhere and had a deflating and then numbing effect. The market went from seemingly living and dying with each announced extension, to most recently barely moving with news. Perhaps a sign of a maturing market, or perhaps the realization that crypto doesn’t need ETFs (which it most certainly doesn’t). Hundreds of billions of dollars in market cap have been achieved in less than a decade, without an ETF and without much institutional involvement. Still, the effort for approval is afoot, and will eventually succeed. There will be a Bitcoin ETF at some point. The effect it will have on the perceived legitimacy of the market, on bringing in institutional money, and ultimately on the price of Bitcoin will be staggering. Time will tell, but it just may begin today with the confirmation of Elad Roisman as SEC Commissioner.