Another loss for the SEC against crypto

SEC’s second court loss in so many months opens the door to much-coveted crypto spot ETFs and gives hope to the whole crypto finance sector

The American crypto industry has scored its second important victory in court. After Ripple won the case against the SEC in July, it was Grayscale’s turn to deliver another blow to the Commission.

Yesterday, the U.S. Court of Appeals for the D.C. Circuit sided with the crypto asset management firm, stating that “The Commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale’s proposed bitcoin ETP”. 

Bitcoin reacted immediately to the news, gaining over 8%.

The shares of $GBTC, the Bitcoin Trust that Grayscale wants to turn into an ETF, have surged almost 17%, narrowing the existing discount.

Here’s what happened and why it is important for the crypto industry.

Grayscale vs. SEC

Grayscale is the world’s biggest crypto asset management firm, with $21.5 billion of assets under management. The firm represents two-thirds of the market and is undeniably one of the biggest and oldest CeFi (centralized finance) players.

Since 2013, Grayscale has been offering institutional and accredited investors shares in its various cryptocurrency trusts. In exchange for a hefty yearly 2% fee, investors get an easy exposure to crypto without having to deal with any technical or accountancy issues.

To increase its client base and extend the offer to retail investors and those institutions that are not comfortable investing in private trusts, Grayscale decided to convert its flagship product – the $17 billion Bitcoin Trust – into an ETF, an exchange-traded fund.

However, the SEC had different plans: arguing that Bitcoin trades on unregulated (by the SEC) exchanges and can therefore be prone to market manipulation, it denied the application.

In June 2022, Grayscale filed a lawsuit against the SEC, challenging the grounds for rejection. Fourteen months later, it triumphed. Judge Neomi Rao wrote that “the denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products.”

Indeed, back in 2021, the SEC approved several ETFs based on Bitcoin futures regulated by the CFTC (Commodity Futures Trading Commission) and traded on exchanges like the Chicago Mercantile Exchange. The CFTC’s implication seems to have played a role in the SEC’s reasoning, but from the investor’s point of view, there was no real difference. If anything, Bitcoin futures ETFs are technically more complex and dangerous products than Bitcoin spot ETFs, and the judges saw into it.

What’s next?

It might be too early to celebrate the first crypto spot ETF. Grayscale’s victory in court does guarantee an immediate ETF approval, it only means that the company can re-apply for it.

This outcome, however, deals a hard blow to the SEC’s main line of reasoning, which it has been using to reject over 30 ETF filings since 2021.

Now, the Commission has 45 days to decide whether to pursue an appeal or to abide by the ruling. If they appeal using the same reasoning, the chances are high that it will be rejected. If they appeal while changing their rationale, their stance could appear arbitrary.

If it abides, crypto finance could receive a major boost, allowing millions of investors and conservative financial institutions to gain exposure to Bitcoin and probably other cryptoassets.

In the context of Grayscale’s courtroom victory, it would be particularly interesting to observe SEC’s actions on September 1st and 2nd, when it must give a decision on the crypto spot ETF applications filed by Bitwise, Ishares (BlackRock), VanEck, WisdomTree, Invesco, and WiseOrigin (Fidelity).

What impact on the crypto space?

Grayscale commented on their victory, saying that the judge’s ruling was “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.”

Indeed, American crypto spot ETFs are expected to attract millions of clients all over the world, and therefore increase the demand for Bitcoin. This might not align with the crypto purists’ aspirations, but centralized crypto finance, despite all of its Wall Street flare, contributes significantly to the success of crypto markets.

Written by D.Center