Financial Times: How do industry insiders view Grayscale's victory? What is the potential impact on the SEC's upcoming regulations?

Source: “What Grayscale's win means for the SEC and the future of bitcoin ETFs”

Author: Stephen Gandel, Financial Times

Translated by: Mia, Chaincatcher

This Tuesday, cryptocurrency asset management firm Grayscale achieved a brief victory in its pursuit of a spot Bitcoin ETF, as the U.S. Court of Appeals for the D.C. Circuit ordered the U.S. Securities and Exchange Commission (SEC) to reconsider its decision to deny Grayscale Investments' application to convert its Bitcoin Trust (GBTC) into an exchange-traded fund (ETF). Following this, the price of Bitcoin surged 7% to nearly $28,000, providing some solace to the beleaguered crypto industry.

However, this does not mean that investors can immediately purchase Grayscale's spot ETF. Similarly, the SEC's enforcement actions against industry giants like cryptocurrency exchanges Coinbase and Binance will not be immediately affected. The regulatory body still has a long way to go in taming the so-called "Wild West" of finance (the crypto industry).

How did the court rule?

The federal appeals court ruled that the SEC's denial of Grayscale's application to convert its flagship product, the Grayscale Bitcoin Trust, into an ETF was erroneous. Reportedly, the SEC approved the Grayscale Bitcoin Trust in 2015, and the fund currently holds over $15 billion in Bitcoin. Since October 2021, the SEC has begun approving Bitcoin futures ETFs but has deemed spot funds susceptible to manipulation, as crypto tokens trade 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 release, "This is a monumental step forward for American investors, the Bitcoin ecosystem, and those who hope to promote Bitcoin more broadly in ETF form."

What happens next?

The SEC will have 45 days to decide whether to comply with the ruling, seek a rehearing from the D.C. Circuit Court, or appeal directly to the Supreme Court. The SEC stated on Tuesday that it is reviewing the ruling.

Industry lawyers indicate 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 deny new applications for other reasons.

In reality, investors also seem to believe that Grayscale's conversion of the Bitcoin Trust (GBTC) to an ETF is likely to face new challenges. Grayscale has long sought to convert its trust into an ETF, one of the key reasons being that, unlike ETFs, trust funds often trade at a discount to their underlying assets. Even after the ruling was announced on Tuesday, the trading price of the Grayscale Trust remained below 20%, indicating that investors remain cautious about a quick conversion.

Additionally, the financial reform organization Better Markets suggested that the SEC address the court's concerns in another 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, Europe's first spot Bitcoin ETF began trading. In the U.S., there are over a dozen other applications awaiting approval, including some from the largest asset management firms in the country. Lawyers say that all these applications will face similar issues, including preventing market manipulation and how to price assets at the end of the trading day.

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 closely watched ETF proposal comes from the world's largest asset management firm, BlackRock. Reportedly, this application was first submitted on June 15, and the SEC officially added BlackRock's application to its review list on July 13. Subsequently, Invesco, VanEck, and WisdomTree also submitted similar proposals, all of which will face initial deadlines this week.

SEC observers suggest that the commission is likely to delay its decision by 45 days, pushing it to mid-October.

Jeremy Senderowicz of Vedder Price commented, "I think the likelihood of these proposals being approved simultaneously is quite high."

What impact does this have on the regulation of digital assets?

The digital asset community is ecstatic about Grayscale's victory. Coinbase's Chief Legal Officer Paul Grewal called it "a great moment for the industry," adding that while they still believe comprehensive federal cryptocurrency legislation is the best way forward, rulings like this are an important step toward the clarity the industry needs.

Teresa Goody Guillén of BakerHostetler views the ruling in the Grayscale case as "a heavy blow to the SEC," stating, "This confirms that the SEC's attitude toward cryptocurrencies has forced it to face legal challenges—whether through arbitrariness and capriciousness, overstepping its statutory authority, or inappropriate rule-making. Undoubtedly, this also confirms that the courts are holding the SEC accountable for its legal obligations and its attitude toward cryptocurrencies."

Furthermore, this ruling may also energize those who wish to transfer more regulatory authority to another agency—the Commodity Futures Trading Commission (CFTC), which oversees derivatives.

Lewis Cohen of DLXLaw remarked, "The appeals court used harsh language to punish the SEC, which is truly embarrassing for the SEC."

What impact does this have on the SEC's enforcement cases against Coinbase and Binance?

The focus of the Grayscale ruling is on the SEC's administrative procedures, rather than its legal authority for regulation and enforcement. Therefore, this case does not have a direct impact on the SEC's lawsuits against Coinbase and Binance for alleged violations of securities laws.

Earlier rulings by lower U.S. courts regarding cases involving Ripple found that the company's related tokens did not violate securities laws when traded on the secondary market, which raises questions about the aforementioned cases. The SEC is currently appealing, but if the ruling stands, it would weaken its previous regulatory effectiveness regarding the securitization of digital assets.

In this regard, industry lawyers have expressed that, although legally distinct, the Grayscale ruling could be used to further argue that the SEC has misinterpreted existing laws.

Duke University crypto law professor Lee Reiners stated, "The crypto industry sees this as yet another example of the SEC overstepping its bounds, enough to prove that the SEC has become an out-of-control agency."