What Grayscale’s win against the SEC actually means

While many agree Grayscale Investments’ court win against the US Securities and Exchange Commission signals a spot bitcoin ETF is coming to the US, such a listing is not a done deal as the regulator plots its next move.

Grayscale’s victory in the DC Court of Appeals essentially prevents the SEC from denying spot bitcoin ETFs under reasons it has given in the past, and while bitcoin futures ETFs exist. Still, the approval of such proposals is “not 100%,” one industry watcher noted.

DC Circuit Court of Appeals judges determined in a Tuesday ruling that the SEC’s decision to approve bitcoin futures funds, but not Grayscale’s proposed conversion of its Bitcoin Trust (GBTC), was “arbitrary and capricious.”

Judge Neomi Rao wrote in the decision that the US securities regulator “failed to explain its different treatment of similar products,” and thus the SEC’s order was vacated.

The SEC has 45 days to appeal — an action that could send the decision to the US Supreme Court or to what is known as an “en banc” panel review.

“We are reviewing the court’s decision to determine next steps,” an SEC spokesperson said in an email.

Arie Heijkoop, partner at law firm Haynes Boone, said he does not expect the SEC to appeal.

“The Court was forceful enough in explaining where the SEC’s decision was inadequate so that this decision is not likely to be overturned,” Heijkoop told Blockworks. “And the decision does leave room for the SEC to review its denial of Grayscale and articulate other reasons for denying it if it is still not inclined to approve a spot bitcoin [product].”

Bullish for spot bitcoin ETFs, BTC price

Matt Hougan, chief investment officer of prospective spot bitcoin ETF issuer Bitwise, called the Tuesday ruling “a win for crypto and a win for American investors as it pushes us one big step closer to gaining approval for a spot bitcoin ETF.”

The SEC is set to rule on, or delay its decision for, a range of spot bitcoin ETF applications this week, including those by Bitwise, BlackRock, Fidelity and others.

Tim Bevan, CEO at crypto exchange-traded product issuer ETC Group, said though an SEC appeal of the Tuesday court decision seems “inevitable,” he believes it signifies the introduction of spot bitcoin ETFs in the US.

Even though markets in Canada, Brazil, and Europe trade such products, the US securities regulator has yet to permit a spot bitcoin ETF to come to market.

Bevan anticipates that the SEC might approve several proposed spot bitcoin ETFs at once, estimating that could occur in the first quarter of 2024.

“The level of pent up institutional and retail demand in the US is significant,” Bevan added. “We expect this to have a positive impact on the price of bitcoin as can be seen from today’s price reaction, as well as further accelerate the global trend towards acknowledging crypto as a new asset class.”

Bitcoin’s (BTC) price was nearly $28,000, as of 1 pm ET — up 7% from 24 hours ago, and up 2% in the last hour.

The asset’s immediate price surge after the ruling “underlines the market’s anticipation and the profound impact such a decision holds,” according to Ji Kim, general counsel and head of global policy for the Crypto Council for Innovation.

Roxanna Islam, associate director of research at data firm VettaFi, said in an email that Grayscale’s win is a huge victory for all proposed spot bitcoin ETFs.

“While we will still have to wait and see how the SEC handles its execution, it is likely that they will have to approve Grayscale’s spot ETF along with other pending spot bitcoin ETF filings,” she said.

Islam told Blockworks she expects the SEC to accept the court’s decision, though that doesn’t necessarily mean GBTC’s conversion to an ETF would come in the next few weeks. A late 2023 or 2024 conversion, alongside other spot bitcoin ETF approvals, is more likely, she explained.

Odds of GBTC conversion “not 100%”

While the court’s decision calls out the SEC’s different treatment of spot bitcoin and futures-based products as unfair, it doesn’t order the regulator to approve GBTC’s conversion to an ETF, Islam said.

Bloomberg Intelligence analyst James Seyffart said that though the odds of GBTC being able to convert to an ETF have increased after the decision, they are “not 100%.”

He clarified that it’s uncertain if the SEC will deliver a new decision in the upcoming weeks or months, or require Grayscale to submit a 19b-4 form—used to notify the regulator of a proposed rule alteration.

“All we know is that the SEC cannot deny spot ETFs using the arguments they’ve used in the past denial letters relating to fraud and manipulation while bitcoin futures ETFs exist,” Seyffart told Blockworks.

The Bloomberg Intelligence analyst added in X posts Tuesday that the SEC could deny the conversion of GBTC to an ETF based on reasons it has not used before — noting potential objections around the custody of bitcoin, for example.

Seyffart noted that the SEC might consider revoking the listings of current bitcoin futures ETFs, though he deems such a move to be “unlikely.”

“It depends on the strengths of Gary Gensler and the SEC’s beliefs towards not allowing bitcoin ETFs to exist,” he said. “It’s gotten much much harder for them to keep denying, but not impossible.”

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