This week, Grayscale scored a resounding legal victory over the energetic and ruthless SEC, in its efforts to offer a spot bitcoin exchange traded fund.
One result was that the price of bitcoin subsequently shot up 7% to nearly $28,000. But that does not mean investors will be able to run out and buy a Grayscale spot ETF tomorrow.
Nor does it immediately doom efforts by the US Securities and Exchange Commission (SEC) to bring enforcement actions against some of the industry’s biggest players, including crypto exchanges Coinbase and Binance.
The story of the watchdog’s efforts to tame what it sees as a financial wild west still has some way to run.
What the court ruled
A federal appeals court ruled that the SEC was wrong to reject Grayscale’s application to convert its flagship Grayscale Bitcoin Trust, which the SEC approved in 2015, and which holds more than $15 billion in bitcoin, into an ETF.
The SEC has allowed bitcoin futures ETFs since October 2021 but contended that spot funds were prone to manipulation, since crypto tokens trade on largely unregulated markets.
Judge Neomi Rao wrote in the decision that the SEC’s denial was “arbitrary and capricious because the commission failed to explain its different treatment of similar products”.
“This is a monumental step forward for American investors, the bitcoin ecosystem, and all those who have been advocating for bitcoin exposure through the added protections of the ETF wrapper,” Grayscale said in a statement.
What are the next steps?
The SEC has 45 days to decide whether to abide by the decision, ask the full federal appeals court in Washington to review it, or take an appeal straight to the Supreme Court. It said it was reviewing the decision.
Lawyers said Grayscale would have to file a new application for its ETF. But there is no guarantee that it will be approved, despite the court’s decision — the SEC could reject it on other grounds.
Indeed, investors still seem to think that the Grayscale trust’s conversion could get gummed up. One reason Grayscale has long sought to convert its trust into an ETF is that trusts, unlike ETFs, often trade at a discount to their holdings.
Even after Tuesday’s ruling, the Grayscale trust was still trading at a 20% discount, a sign that investors are wary that a conversion will happen soon.
Financial reform group Better Markets suggested that the agency could address the court’s concerns another way — by cancelling bitcoin futures ETFs rather than approving new spot products.
The ruling “does not change the fact that the bitcoin market is subject to fraud and manipulation or that an ETF would be a serious threat to investors”, said Dennis Kelleher, its chief executive.
What does ruling mean for other bitcoin ETFs?
The first European spot bitcoin ETF started trading earlier this month. In the US, there are more than a dozen other applications pending, including some from the largest US asset managers.
All of them would face similar questions about preventing market manipulation and how to price the asset at the end of the trading day, lawyers said.
Even though Grayscale had successfully challenged the SEC’s decision, there was no legal guarantee that it would jump to the front of the queue for review.
The most closely watched ETF proposal is from BlackRock, the world’s largest asset manager. It first filed in June 15, and the SEC officially added the BlackRock application to its docket on July 13, followed by similar proposals from Invesco, VanEck and WisdomTree.
All of them are coming up for preliminary deadlines this week.
SEC watchers said the commission would most likely impose a 45-day delay that puts the decisions off until mid-October.
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