Although the cryptocurrency industry has achieved a brief victory, it is still unknown whether regulatory agencies are ready to relax their restrictions.
Source: “What Grayscale’s win means for the SEC and the future of bitcoin ETFs”
Author: Stephen Gandel, Financial Times
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This Tuesday, cryptocurrency asset management company Grayscale achieved a brief victory in providing a spot Bitcoin ETF. The US Federal Circuit Court of Appeals has ordered the US Securities and Exchange Commission (SEC) to reconsider its decision to reject Grayscale Investments’ conversion of its Bitcoin Trust Fund (GBTC) to an exchange-traded fund (ETF). Subsequently, the price of Bitcoin soared 7% to nearly $28,000, bringing some comfort to the struggling cryptocurrency industry.
However, this does not mean that investors can immediately buy Grayscale spot ETFs. Similarly, the efforts of regulatory agencies, such as the SEC, to take enforcement actions against industry giants like Coinbase and Binance, will not be immediately affected. Regulators still have a long way to go to tame the so-called “Wild West” (cryptocurrency industry).
How did the court rule?
The Federal Appeals Court ruled that the SEC’s rejection of Grayscale’s application to convert its flagship product, Grayscale Bitcoin Trust, into an ETF, was incorrect. It is reported that the SEC approved the Grayscale Bitcoin Trust in 2015, and the fund currently holds over $15 billion worth of Bitcoin. Since October 2021, the SEC has started approving Bitcoin futures ETFs, but it believes that spot funds are vulnerable to manipulation because cryptocurrency tokens are traded in a largely unregulated market.
Judge Neomi Rao wrote in the ruling that the SEC’s denial was “arbitrary and capricious, as the Commission could not explain its differing treatment of similar products.”
Grayscale stated in a statement, “This is a milestone for US investors, the Bitcoin ecosystem, and those who expect Bitcoin to be more widely promoted in the form of ETFs.”
What will happen next?
The SEC will have 45 days to decide whether to comply with the ruling, request a rehearing from the Washington Federal Appeals Court, or directly appeal to the Supreme Court. The SEC stated on Tuesday that it is reviewing the ruling.
Industry lawyers have said that Grayscale will need to submit a new application for its ETF. In fact, although the court has made a ruling, it cannot guarantee that the new application will be approved – the SEC may continue to reject it for other reasons.
In fact, investors seem to believe that the conversion of Grayscale Bitcoin Trust (GBTC) to an ETF is likely to face new challenges. For a long time, Grayscale has been seeking to convert its trust into an ETF, and one of the important reasons is that, unlike ETFs, the trading price of trust funds is often lower than the value of the assets held. Even after the announcement of the ruling on Tuesday, the trading price of the Grayscale Trust Fund is still below 20%, indicating that investors remain cautious about the conversion happening quickly.
In addition, the financial reform organization Better Markets has suggested that the SEC address the court’s concerns in a different way—by canceling Bitcoin futures ETFs rather than approving new spot products. Its CEO, Dennis Kelleher, stated that the ruling “does not change the fact that the Bitcoin market is subject to fraud and manipulation, nor does it change the fact that ETFs pose a serious threat to investors.”
What impact does this have on other spot Bitcoin ETFs?
Earlier this month, the first spot Bitcoin ETF in Europe began trading. In the United States, there are over ten other applications awaiting approval, including some from the largest asset management companies in the country. Lawyers say that all of these applications will face similar issues, including preventing market manipulation and determining asset pricing at the end of trading days.
Teresa Goody Guillén, a partner at BakerHostetler, stated that although Grayscale successfully challenged the SEC’s decision, there is no legal guarantee that it will jump to the front of the review queue.
The most anticipated ETF proposal comes from the world’s largest asset management company, BlackRock. It is reported that the application was first submitted on June 15th, and the SEC officially added BlackRock’s application to its pre-review list on July 13th. Subsequently, Invesco, VanEck, and WisdomTree also submitted similar proposals, all of which will face their initial deadlines this week.
SEC observers say that the committee is likely to delay its decision by 45 days, pushing it back to mid-October.
Jeremy Senderowicz of Vedder Price commented, “I think there is a high likelihood that these proposals will be approved simultaneously.”
What impact does this have on the regulation of cryptocurrencies?
The digital asset community is ecstatic about Grayscale’s victory. LianGuaiul Grewal, Chief Legal Officer of Coinbase, called it “a great moment for the industry. While we still believe that comprehensive federal cryptocurrency legislation is the best way forward, rulings like this are an important step in the direction the industry needs.”
Teresa Goody Guillén, a partner at BakerHostetler, believes that the ruling in the Grayscale case is a “heavy blow to the SEC.” She stated, “This confirms that the SEC’s attitude towards cryptocurrencies has forced it to face legal challenges—whether it be arbitrariness and capriciousness, exceeding its statutory authority, or inappropriate rulemaking. There is no doubt that this also confirms that the courts are making the SEC accountable for its legal obligations and its attitude towards cryptocurrencies.”
Furthermore, this ruling may provide motivation for those who wish to transfer more regulatory authority to another regulatory agency—the Commodity Futures Trading Commission (CFTC), which is responsible for regulating derivatives.
DLXLaw’s Lewis Cohen said: “The appeals court uses harsh language to punish the SEC, which is really embarrassing for the SEC.”
What impact does this have on the SEC’s enforcement cases against Coinbase and Binance?
The focus of the ruling on Grayscale is on the SEC’s administrative procedures, not its regulatory and enforcement powers. Therefore, this case does not have a direct impact on the SEC’s lawsuits accusing Coinbase and Binance of violating securities laws.
Earlier rulings by lower courts in cases involving Ripple concluded that the company’s related tokens did not violate securities laws in secondary market transactions, which to some extent raised questions about the above-mentioned cases. The SEC is currently appealing, but if the ruling stands, it will weaken its previous effectiveness in regulating the securitization of digital assets.
In response, industry lawyers have expressed their views, stating that although legally different, the ruling on Grayscale can be used to further accuse the SEC of misinterpreting existing laws.
Lee Reiners, a professor of cryptocurrency law at Duke University, said, “The cryptocurrency industry sees this as another example of the SEC overstepping its authority, proving that the SEC has become an out-of-control institution.”