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The price of bitcoin experienced a 5% drop when regulators postponed their approval of the first US ETFs that directly invest in the cryptocurrency. This development dashed investor hopes for a quick entry into the world’s largest capital market.
In a series of filings on Thursday, the US Securities and Exchange Commission (SEC) stated that it needed more time to review seven bitcoin ETF applications, including one from BlackRock, the largest asset manager worldwide.
Following the court ruling that deemed the SEC’s rejection of Grayscale’s application for its flagship vehicle, the Grayscale Bitcoin Trust, as incorrect, the price of bitcoin saw a significant decline. The SEC is now under pressure to reconsider its decade-long policy of refusing ETFs tied directly to bitcoin.
Crypto advocates have been advocating for a spot bitcoin ETF for some time, claiming that it would provide consumers with a cost-effective and secure alternative to trading the coin, as opposed to purchasing it directly from unregulated crypto exchanges. The demand for a spot bitcoin ETF has increased this year, with traditional players like Fidelity, WisdomTree, Invesco Galaxy, VanEck, Bitwise, and Valkyrie Digital Assets also having their applications delayed.
On the other hand, the SEC has argued that it cannot guarantee that the bitcoin market is immune to manipulation. In July, SEC Chair Gary Gensler referred to the crypto market as “rife with fraud, rife with hucksters.” Nonetheless, the SEC has approved bitcoin futures ETFs, which track futures prices linked to the cryptocurrency.
Following the Washington court’s ruling, the SEC has 45 days to decide whether to comply with the decision, request a review from the court, or file a direct appeal. The SEC is currently “reviewing the court’s decision to determine next steps.” The regulator is expected to make its decisions on spot bitcoin ETFs in mid-October.
“We believe it is plausible for the SEC to develop alternative arguments to justify continued rejections of spot bitcoin ETF applications based on specific concerns regarding the spot bitcoin market,” stated Mark Palmer, an analyst at Berenberg Capital Markets.
He noted that Coinbase’s involvement in the ETF filings further complicates the issue. Earlier this year, the regulator sued Coinbase for allegedly violating US securities laws. Palmer added, “It would not be surprising if Coinbase’s potential involvement in those ETFs were to contribute to the SEC’s arguments for rejecting the applications.”
However, lawyers suggest that the SEC will face challenges if it tries to reject these applications again by citing new concerns. The SEC has long based its opposition to these products on the grounds of market manipulation.
“In theory, they could attempt to oppose these applications on different grounds, but for years they have focused solely on the argument that there is no sufficiently regulated market for trading cryptocurrencies, and the court has unequivocally rejected the SEC’s argument,” said Jeremy Senderowicz of law firm Vedder Price.
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