The US Court of Appeals for the Federal Circuit in Washington, D.C., US, delivered a groundbreaking ruling on Wednesday, August 9th, 2022 (source: Al Drago | Bloomberg | Getty Images).
The Securities and Exchange Commission (SEC) finds itself in a challenging situation due to a recent court ruling. The U.S. Court of Appeals for the D.C. Circuit has sided with Grayscale in a lawsuit against the SEC, greatly enhancing the likelihood of the approval of a bitcoin exchange traded fund (ETF). Previously, the SEC had rejected Grayscale’s application to convert its Grayscale Bitcoin Trust into an ETF.
What puts the SEC in a difficult position is that the court ruling directly questions the foundation on which the SEC has been denying spot bitcoin ETFs for years. The SEC has maintained that it cannot approve a spot bitcoin ETF due to the lack of a regulated crypto market of sufficient size to prevent manipulation. However, the court criticized the SEC for approving a futures-based bitcoin product while denying a spot bitcoin ETF. Essentially, the court argued that if the SEC approves one, it should approve the other since the futures and spot markets for bitcoin are closely related.
The appeals court declared, “Because the spot and futures markets for bitcoin are highly related, it stands to reason that manipulation in either market will affect the price of bitcoin futures.” Furthermore, it called the denial of Grayscale’s proposal “arbitrary and capricious” and highlighted the SEC’s failure to explain its differential treatment of similar products.
While this ruling may pave the way for a bitcoin ETF, the concern over potential manipulation remains. The court’s decision merely points out the SEC’s inconsistency in approving one type of ETF and rejecting another.
What’s next?
Now, the future course of action depends on SEC Chair Gary Gensler. The SEC has several choices to make. Firstly, it must decide whether to appeal the ruling, during which time the order would be stayed until the appeal decision is made. The regulator has a 45-day timeframe to make this decision, and while an appeal is possible, the strong language used in the court’s ruling makes it more challenging for the SEC to pursue an appeal.
Based on the decision to appeal, there are several options:
1) Approve all or some of the nine spot bitcoin ETF applications promptly. The SEC could comply with the court ruling and issue an order allowing the Grayscale ETF to list on NYSE Arca or approve other applied funds.
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 the decision for as long as possible. The first applicant to file was Ark, which submitted its application on May 15 and the SEC has a maximum of 240 days to approve or deny these applications, with the first deadline on January 10, 2024.
3) Devise a new rationale for rejecting the application and challenge Grayscale to sue again. While the SEC can no longer argue the lack of a market size sufficient to prevent manipulation, it may find other grounds to oppose the application.
What those grounds could be remains uncertain.
Finally, there is the last possibility that the SEC could terminate the bitcoin futures ETF. Although theoretically possible, it seems unlikely given the recent approval of (leveraged) bitcoin futures by the SEC.
Who’s first in line?
Even if a spot bitcoin ETF is inevitable, it does not guarantee that Grayscale will be the first to receive approval. It is possible that the SEC may approve ARK first or all the applications simultaneously. One can’t help but wonder if the SEC now regrets approving bitcoin futures.
Note: Matt Hougan, Chief Investment Officer for Bitwise Asset Management, one of the applicants for a spot bitcoin ETF, will appear on ETF Edge on Halftime Report Wednesday. For ETF Edge at 2:00 PM ET, Hougan will be joined by Craig Salm, Grayscale’s Chief Legal Officer, and Jeremy I. Senderowicz, an attorney with VedderPrice who has represented ETFs for nearly 20 years.
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