The United States Court of Appeals for the Federal Circuit in Washington, DC, USA on Wednesday, August 9, 2022.
Al Drago | Bloomberg | Getty Images
Well, now the SEC is in a real crisis.
The US Circuit Court of Appeals for the DC Circuit has sided with Grayscale in a lawsuit against the SEC, greatly improving the chances of a Bitcoin exchange-traded fund being approved. The SEC previously denied Grayscale’s application to convert its Grayscale Bitcoin Trust into an ETF.
The problem for the SEC is that the court has rejected the very basis on which the SEC has rejected a spot bitcoin ETF for the past several years.
The SEC has stated that it cannot approve a spot bitcoin ETF because there is no regulated crypto market large enough to prevent manipulation.
But the court criticized the SEC for its prior approval of a futures-based Bitcoin product. The court essentially said, “Hey, you approved a futures-based Bitcoin product.” The futures and spot market are “similar” products. If you approve one, you must also approve the other.
“Since the bitcoin spot and futures markets are closely related, it stands to reason that manipulations in either market will affect the price of bitcoin futures,” the court said.
“The rejection of Grayscale’s proposal was arbitrary and haphazard because the commission failed to explain its differential treatment of similar products,” the appeals court said.
The tragedy of this ruling is that it does nothing to allay concerns about a possible manipulation that has not gone away. The court merely stated that the SEC erred in approving one ETF (bitcoin futures) and not approving another (spot bitcoin).
Where to from here
What’s next? Much depends on whether SEC boss Gary Gensler wants to give up or fight to the end.
The SEC has several decisions to make.
The first question is whether to appeal the case. If so, the order would be stayed pending a decision on the appeal. The regulator has 45 days to make this decision. An appeal is possible, but the harsh tone of the court’s ruling certainly makes it more difficult for the SEC to appeal.
Depending on the decision to appeal, there are several options after that.
1) Approve all or some of the nine spot bitcoin ETF applications as soon as possible. The SEC could go along with the court ruling and issue an order that would allow the exchange on which the Grayscale ETF would list (NYSE Arca) to proceed with listing Grayscale’s fund or authorize other funds it has applied for.
Applicants for a spot bitcoin ETF
- Grayscale Bitcoin Trust
- Ark/21 shares Bitcoin Trust
- Bitwise Bitcoin ETF Trust
- BlackRock Bitcoin ETF Trust
- VanEck Bitcoin Trust
- WisdomTree Bitcoin Trust
- Valkyrie Bitcoin Fund
- Invesco Galaxy Bitcoin ETF
- Fidelity Wise Origin Bitcoin Trust
2) Delay as long as the law allows. The first applicant to file an application was Ark, which was published in the Federal Register on May 15. The SEC has a maximum of 240 days to approve or deny these filings, meaning the first deadline would be January 10, 2024.
3) Come up with a new reason why the application should not be approved and challenge Grayscale to sue again. The SEC can no longer argue that there is not a large enough market to prevent manipulation, but could make other arguments.
like what That is not clear.
There is one last possibility: the SEC could just kill the bitcoin futures ETF. That’s theoretically possible, but unlikely considering the SEC recently approved (leveraged) bitcoin futures.
Who is first in line?
Even assuming a spot bitcoin ETF will come to market, that doesn’t mean Grayscale can necessarily cross the line. It is possible that the SEC will approve ARK first or all at once.
I wonder if the SEC regrets this decision to allow bitcoin futures.
Note: Matt Hougan, Chief Investment Officer for Bitwise Asset Management, one of the contenders for a spot Bitcoin ETF, will appear in Wednesday’s mid-term report on ETF Edge. For ETF Edge at 2:00 p.m. ET, Hougan will be joined by Craig Salm, Grayscale’s Chief Legal Officer, and Jeremy I. Senderowicz, an attorney at VedderPrice who has represented ETFs for nearly 20 years.
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