SEC Pressured by Lawmakers to Greenlight Spot Bitcoin Options Trading

The SEC has been delaying decisions on spot Bitcoin options trading applications from major exchanges like the New York Stock Exchange, Nasdaq, and Cboe Global Markets.

U.S. lawmakers are actively pushing the SEC to approve options trading on Bitcoin exchange-traded products (ETPs). Meanwhile, concerns about cryptocurrency's role in national security are also being raised, with Senators Elizabeth Warren and Angus King shedding light on the potential threats from Iranian crypto miners and their connection to government activities. In the realm of privacy, Alan Scott Jr. shared that he has seen a more positive attitude towards crypto privacy from U.S. senators and the FBI than most people assumed.

Lawmakers Urge SEC to Approve Spot Bitcoin Options Trading

U.S. lawmakers are pushing the Securities and Exchange Commission (SEC) to greenlight options trading on Bitcoin exchange-traded products (ETPs). Representatives Mike Flood and Wiley Nickel wrote a letter to SEC Chair Gary Gensler, criticizing the unequal treatment of crypto funds compared to traditional ones. They also specifically pointed out the discrepancy between the already trading options for Bitcoin futures ETFs and the yet-to-be-approved options for spot Bitcoin ETPs.

Flood and Nickel’s urgency comes as the SEC has been continuously delaying decisions on applications from major exchanges like the New York Stock Exchange, Nasdaq, and Cboe Global Markets, all of which submitted their applications in January. These applications include Nasdaq's proposal to list options on BlackRock's iShares Bitcoin Trust and Cboe's plan to offer options trading on various Bitcoin funds. The NYSE is also interested in trading options on products like the Bitwise Bitcoin ETF and the Grayscale Bitcoin Trusts.

The SEC has started another round of consultations to assess the potential impact of Bitcoin options on the stability of the market, especially under volatile conditions. The agency is also reviewing whether existing market surveillance and enforcement mechanisms are actually good enough to handle the complexities introduced by Bitcoin options. Stakeholders and participants have until May 15 to submit their initial comments, with a follow-up period for rebuttal comments ending on May 29.

What are Bitcoin Options?

Bitcoin options are a type of financial derivative that allows investors to buy or sell Bitcoin at a predetermined price on a specific future date, without the obligation to do so. These options operate similarly to options contracts for stocks, indexes, or commodities, where the principal mechanics are the same, yet they are distinct in that their underlying asset is Bitcoin.

Despite the technical similarities to more traditional options, Bitcoin options are relatively new and are less liquid compared to their conventional counterparts. This liquidity difference stems from the overall smaller size of crypto markets when compared to well-established financial markets like those for stocks or gold. This lack of depth can lead to greater price slippage, especially for options with longer durations.

One key aspect of trading Bitcoin options is the effect of time decay. As the expiration date of the option approaches, its value tends to decrease because of the diminishing time available to exercise the option. This makes trading Bitcoin options more complex than simple spot trading of the cryptocurrency.

Crypto Mining Threats in Iran

Spot Bitcoin Options are not the only issue on U.S. lawmakers’ minds. United States Senators Elizabeth Warren and Angus King have raised some serious concerns about the potential national security threats posed by cryptocurrency miners in Iran.

In a May 1 letter to key members of the Biden administration, including National Security Advisor Jake Sullivan, Defense Secretary Lloyd Austin, and Treasury Secretary Janet Yellen, the senators pointed out possible connections between Iranian crypto miners and the government, and the use of digital assets to circumvent U.S. sanctions.

The letter shed some light on Iran's use of cryptocurrency to fund activities that threaten U.S. security, including supporting terrorist organizations like Hezbollah. Senators Warren and King even pointed to specific incidents, like the January 2024 drone strike in Jordan by Hezbollah that caused the deaths of three U.S. service members.

The senators requested detailed information on the revenue generated by crypto miners in Iran, potential involvement in money laundering activities, and the measures being taken to actually mitigate these risks to U.S. national security. They also shred their worry about reports that the Iranian government favors Bitcoin, specifically newly minted ones, as they have some traceability challenges. It is estimated that Iranian BTC miners may have generated up to $1 billion in revenue in 2021.

Despite the legalization of crypto mining in 2019 after a brief government crackdown due to electricity concerns, Iran continues to face widespread sanctions imposed by the United States and other international entities since 1979. Senator Warren, who is notorious for her critical stance on cryptocurrencies and their association with illegal activities, is gearing up for a re-election battle in November against Republican candidate and crypto lawyer John Deaton.

Privacy in Crypto

Alan Scott Jr., a researcher and advocate for the privacy-focused crypto protocol Railgun, recently shared some details from his talks with U.S. senators and the FBI. According to Scott, U.S. Lawmakers have a much less negative stance toward privacy in cryptocurrency than most people thought. At ETH Global in Sydney, Scott shared that his conversations with senators and the FBI revealed a willingness among top government officials to protect and understand the evolving crypto landscape.

The biggest concern from the FBI revolves around the challenges privacy technologies pose to law enforcement when it comes to tracking financial crimes, rather than an outright opposition to privacy itself. He also shared that agencies like the FBI have what he calls an informed curiosity about crypto and DeFi.

More and more discussions about privacy are popping up due to the recent legal actions against other privacy-centric crypto services, like the arrests of the co-founders of Samourai Wallet on money laundering charges. However, Scott is still very optimistic about the future of privacy in crypto, as he believes it has an essential role in a decentralized financial system.

Terraform Contests SEC's Heavy Fines

Meanwhile, regulators are experiencing some push-back from the crypto industry. Terraform Labs (TFL) and its co-founder Do Kwon are currently in a legal battle with the SEC, fighting tooth and nail against the very hefty penalties proposed by the regulator.

After a jury verdict that found them liable for fraud, a hearing is set for May 22 to discuss possible remedies. The SEC suggested imposing $5.3 billion in disgorgement, interest, and civil penalties on TFL and Kwon. However, Terraform's legal team believes that this massive financial penalty is unjustified, arguing that their token sales and operations were mainly conducted outside the U.S. and did not directly cause the losses central to the SEC's case.

Terraform's lawyers have pointed out that the SEC also does not have enough evidence to link the defendants' limited U.S. activities to the alleged financial damages. They also argued that claiming such a large disgorgement would give the SEC overly broad enforcement powers, amounting to a "territorially unlimited injunction." Instead, Terraform suggested that a much more reasonable penalty would be $1 million in civil fines.

Do Kwon, who is currently detained in Montenegro pending potential extradition to the U.S. or South Korea, has also challenged the SEC’s proposed penalties. He holds firm that his actions happened entirely outside the United States and should not be subject to U.S. jurisdiction.

During the upcoming court session, both parties will present their arguments on the appropriate remedies to Judge Jed Rakoff.