- Grayscale Investments has won a crucial legal battle against the SEC, potentially paving the way for a Bitcoin ETF
- The court decision marks a blow to the SEC’s stance on cryptocurrency and has caused a surge in Grayscale’s Bitcoin Trust and Bitcoin’s price
- While Grayscale’s victory challenges the SEC’s approach it does not guarantee a Bitcoin ETF
Bitcoiners were celebrating yesterday as Grayscale scored a vital victory in its battle to convert its Grayscale Bitcoin Trust into a spot Bitcoin ETF. Grayscale emerged victorious in a pivotal battle against the US Securities and Exchange Commission (SEC) that could reshape the landscape of cryptocurrency investments as a three-judge court ruled that the SEC’s decision to block conversion last June was “arbitrary and capricious” and vacated the SEC’s decision. While the ruling is great news in principle, it does not mean that a Bitcoin ETF will naturally follow, with the decision still in the SEC’s court.
“Arbitrary and Capricious” Decision Riles Judges
The SEC’s rejection of Grayscale’s conversion proposal in 2022 hinged on concerns that a Bitcoin-based ETF lacked sufficient oversight mechanisms to detect fraud. Grayscale responded by legally contesting the SEC’s decision, accusing it of discriminatory treatment while approving comparable Bitcoin futures ETFs.
Judge Neomi Rao, in her written opinion, criticized the SEC’s denial of Grayscale’s proposal as “arbitrary and capricious” due to the lack of explanation for its differential treatment of similar products, with the court underscoring the substantial commonalities between Grayscale’s product and SEC-approved Bitcoin futures ETFs. The court highlighted that both product types boast closely correlated underlying assets and equivalent surveillance-sharing agreements with the Chicago Mercantile Exchange.
During the legal proceedings, the judges also scrutinized the SEC’s reasoning and appeared to align with Grayscale’s argument asserting that the risk of fraud and manipulation is comparable in the markets for both spot Bitcoin and Bitcoin futures.
In a statement, Grayscale characterized the ruling as “a monumental step forward for American investors,” especially coming hot on the heels of Ripple’s defeat of the SEC’s characterization of its XRP token as a security in July.
Grayscale Needs Bitcoin ETF
The crypto markets unsurprisingly resonated positively with the verdict; the Grayscale Bitcoin Trust soared by as much as 21%, while Bitcoin experienced an impressive surge of up to 8.3%. Grayscale has championed its conversion into an ETF, asserting that this transformation would unlock substantial value for investors in its $16.2 billion trust by streamlining the creation and redemption of shares.
The trust’s current closed-end structure inhibits investors from redeeming shares during price downturns, leading to significant discounts in comparison to its underlying Bitcoin value. Conversion into an ETF would empower Grayscale to generate and redeem shares, thereby accommodating evolving demand.
Long Way to Go Yet
Despite the victory, it must be noted that the SEC is not dutybound to approve a Bitcoin ETF from Grayscale, or indeed anyone. Following the ruling, the SEC is now faced with a 45-day window to decide whether to comply with the court’s decision, request a review by the full federal appeals court, or directly appeal to the Supreme Court. ETF specialist James Seyffart suggested how the SEC might take this forward:
We’ve already seen how aggressive the SEC can get via Staff Accounting Bulletin 121 (SAB 121). And it wouldn’t surprise me if they lean on something related to custody to still deny these things if they *REALLY* don’t want these things to list. pic.twitter.com/uZNpoUWltc
— James Seyffart (@JSeyff) August 29, 2023
Better Markets, an organization advocating financial reform, suggested an alternative solution for the SEC: discontinuing Bitcoin futures ETFs instead of green-lighting new spot products. Seyffart said that while this was an option the SEC could explore, such an action is “unlikely”.
The immediate impact on other Bitcoin ETFs and the broader regulation of digital assets looms large. The first European spot Bitcoin ETF commenced trading this month. In the US, numerous applications, including those from major asset managers like BlackRock, Invesco, VanEck, and WisdomTree, are awaiting review. These applications all confront similar questions pertaining to preventing market manipulation and pricing mechanisms.
Ruling Won’t Stop SEC’s Steamroller
While Grayscale’s legal triumph challenges the SEC’s crypto stance, it won’t dampen the agency’s enthusiasm for taking a wrecking ball to the crypto sector. The push for comprehensive federal crypto legislation persists, with this ruling representing a significant milestone toward achieving the clarity and regulatory framework that the industry seeks.
As the legal landscape continues to evolve, Grayscale’s victory sets a precedent that underscores the courts’ role in holding the SEC accountable to its regulatory responsibilities within the dynamic crypto landscape, something that regulators and some politicians have been calling for for months.