Author: Stephen Gandel, Financial Times; Translation: Mia
This Tuesday, cryptocurrency asset management company Grayscale achieved a temporary 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’ proposal to convert its Bitcoin Trust Fund (GBTC) into an exchange-traded fund (ETF). Subsequently, the price of Bitcoin surged by 7% to nearly $28,000, bringing some comfort to the beleaguered cryptocurrency industry.
However, this does not mean that investors can immediately buy the Grayscale spot ETF. Similarly, the SEC’s efforts to enforce action against industry giants such as cryptocurrency exchanges Coinbase and Binance will not be immediately affected. Regulatory agencies still have a long way to go in taming the so-called “wild west” (cryptocurrency industry).
How did the court rule?
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The federal appeals court ruled that the SEC’s rejection of Grayscale’s application to convert its flagship product, the Grayscale Bitcoin Trust Fund, into an ETF, was incorrect. It is reported that the SEC approved the Grayscale Bitcoin Trust Fund in 2015, and the fund currently holds over $15 billion worth of Bitcoin. From October 2021, the SEC began approving Bitcoin futures ETFs, but believed that spot funds are susceptible to manipulation because cryptocurrencies are traded in a largely unregulated market.
Judge Neomi Rao wrote in the ruling that the SEC’s denial was “arbitrary and capricious because the Commission cannot explain its different treatment of similar products.”
Grayscale stated in a statement: “This is a milestone for US investors, the Bitcoin ecosystem, and those who hope to promote Bitcoin in ETF form.”
What will happen next?
The SEC will have 45 days to decide whether to comply with the ruling, request the Washington Federal Appeals Court to review it, or directly appeal to the Supreme Court. On Tuesday, the SEC stated that it is reviewing the ruling.
Industry lawyers said that Grayscale will need to submit a new application for its ETF. In fact, despite the court’s ruling, there is no guarantee that the new application will be approved – the SEC may continue to reject it for other reasons.
In fact, investors also seem to believe that the conversion of the Grayscale Bitcoin Trust (GBTC) into an ETF is likely to encounter new difficulties. 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 are still cautious about the conversion happening quickly.
In addition, Better Markets, a financial reform organization, has suggested that the SEC address the court’s concerns by canceling Bitcoin futures ETFs instead of approving new spot products. Dennis Kelleher, CEO of Better Markets, 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 is the impact 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 while 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 BlackRock, the world’s largest asset management company. It is reported that the application was first submitted on June 15th, and on July 13th, the SEC formally added BlackRock’s application to its pre-review list. Subsequently, Invesco, VanEck, and WisdomTree also submitted similar proposals, all of which will face their preliminary deadlines this week.
SEC observers say that the committee is likely to postpone the decision by 45 days, pushing it to mid-October.
Jeremy Senderowicz of Vedder Price Law Firm commented, “I believe there is a high probability that these proposals will be approved simultaneously.”
What is the impact on the regulation of cryptocurrencies?
The victory of Digital Asset Group over Grayscale is cause for celebration. 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 right direction for the industry.”
Teresa Goody Guillén of BakerHostetler Law Firm 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 is arbitrary and capricious, exceeding its statutory authority, or inappropriate rulemaking. Undoubtedly, this also confirms that the courts are holding the SEC accountable for its legal obligations and its attitude towards cryptocurrencies.”
Furthermore, the ruling may provide impetus for those who hope to transfer more regulatory authority to the Commodity Futures Trading Commission (CFTC), which is responsible for regulating derivatives.
DLXLaw’s Lewis Cohen said, “The appellate court’s harsh language is a disgrace to 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, rather than its regulatory and enforcement authority. Therefore, this case does not have a direct impact on the SEC’s lawsuits accusing Coinbase and Binance of violating securities laws.
The previous ruling by a lower court on the Ripple-related case stated that the company’s tokens did not violate securities laws in secondary market trading, which cast doubt on the aforementioned cases to some extent. The SEC is currently appealing, but if the ruling stands, it will weaken its previous regulatory measures on 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 bounds, proving that the SEC has become an out-of-control institution.”
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