What Grayscale's court victory means for crypto and a U.S. spot-Bitcoin ETF
In a year when it has seemed as if U.S. officials were hell-bent on putting much of the cryptocurrency market out of commission, the beaten-down digital-asset industry has finally scored a big legal win.
A U.S. appeals court’s ruling to overturn the Securities and Exchange Commission’s decision to block the first exchange-traded fund tied to the spot price of bitcoin sent the original cryptocurrency soaring more than 7%, its biggest daily gain in months. Perhaps just as important, it boosted spirits in a sector that’s been contending with a near-constant blast of high-profile regulatory enforcement actions, bankruptcies and lawsuits.
While it’s only one victory against the U.S. in a multipronged campaign, the win by Grayscale Investments LLC shows that the SEC’s approach to policing the gray legal areas of crypto — what Coinbase Global Inc. has called “regulation by enforcement” — is far from foolproof. Judge Neomi Rao wrote that the regulator’s denial of the ETF was “arbitrary and capricious” because the SEC had failed to explain its different treatment of similar products.
“This ruling is not just about Grayscale or bitcoin, it sets a precedent for the broader crypto industry,” Ji Kim, general counsel and head of global policy for the Crypto Council for Innovation, wrote in an email. “This is big, positive,and precedent-setting news. It provides the obvious reminder that it is critical for regulators to provide much-needed clarity and rationale when making such critical determinations affecting such a significant industry.”
To be sure, the SEC is likely to fight the ruling. And the ultimate outcome of the case will have little bearing on other parts of the U.S. crackdown on crypto, including the watchdog’s lawsuits against digital-asset exchanges Coinbase and Binance Holdings Ltd. for allowing trading of other tokens the regulator claims are unregistered securities, among other things. (Both companies dispute the SEC’s legal claims.)
Recall that a July ruling in another lawsuit between the SEC and Ripple Labs Inc. led to a similar market pop because it was widely viewed as crypto-friendly. But then the SEC moved to appeal, and a judge in a separate case sent a conflicting signal, dousing the optimism and making the outcome much less clear.
Still, Tuesday’s court action does potentially move bitcoin much closer to more widespread acceptance in the traditional investment industry.
The court’s decision leaves “no doubt” that spot bitcoin ETFs are coming to the market, probably in the first quarter of 2024, Tim Bevan, CEO of crypto exchange-traded product provider ETC Group, wrote in an email. In addition to Grayscale’s attempt to convert its closed-end mutual fund into an ETF, the SEC has also received 10 other bitcoin ETF applications including from BlackRock Inc., VanEck Digital Assets LLC, WisdomTree Digital Commodity Services LLC and Invesco Capital Management LLC — a number of which have deadlines looming right before the Labor-Day weekend.
“We don’t believe the SEC will act as kingmaker,” Bevan said. “The most likely outcome is a block approval of applications that meet requirements.”
The potential total market for spot Bitcoin ETFs could be somewhere in the neighborhood of $150 billion, similar to the amount of assets in gold ETFs, according to Bloomberg Intelligence analyst Eric Balchunas. With financial advisers overseeing $30 trillion in assets in the U.S., it would only take an allocation of about 0.5% to swell Bitcoin ETFs to $150 billion, he adds.
“The other thing you have to know is advisers are scared about this transfer of wealth from the Boomers” to the younger generations, Balchunas said on a recent episode of the "What Goes Up" podcast. “The advisers are going to want to look hip and cool to what the younger people want.”