A recent court ruling in favor of Grayscale Investments is a tremendous milestone for the cryptocurrency industry’s decade-long quest to establish the first Bitcoin ETF (exchange-traded fund). Although the Grayscale EFT ruling does not herald immediate approval for such products, it demonstrates support for the due process within the industry. The Grayscale EFT outcome reflects transparency in the crypto sector, on meeting the SEC’s (Securities and Exchange Commission) investor protection criteria, which has somewhat been facing a dicey whip.
A Short History: How Grayscale and SEC Locked Horns
It has never been an uphill road for cryptocurrency companies when they need to face their toughest obstacle: the SEC. The SEC has harbored a notorious reputation for desisting from giving approval for the first spot Bitcoin ETF.
In June 2022, the SEC simply rejected Grayscale’s application for a spot bitcoin ETF citing the grounds that the proposal did not fulfill certain ‘anti-fraud and investor protection standards’. Grayscale isn’t the only victim here; other dozens of applications such as Fidelity and VanEck have faced the same fate.
The regulator’s resolve to overturn Grayscale EFT potentially backfired when Grayscale Investments sued the SEC, arguing that the agency had overlooked its own ruling for surveillance agreements.
What’s the tea? The SEC has approved Bitcoin futures ETFs, facilitated through market surveillance arrangements with entities like the Chicago Mercantile Exchange (CME), a major platform for Bitcoin futures trading. Grayscale argues that the same surveillance setup should be sufficient for its spot ETF proposal, because both products rely on Bitcoin’s underlying price.
The SEC is now facing the heat of other courts dubbing its decision as ‘unlawful’.
Grayscale EFT: A Victory For The First Bitcoin ETF
A three-judge panel in the District of Columbia Court of Appeals in Washington ruled against the SEC’s rejection of Grayscale’s proposed Bitcoin ETF, stating that the regulatory agency failed to provide adequate reasoning for its decision. The ruling precedes a review of Grayscale’s application by the SEC, which is a door waiting to open, for definitive approval for the first Bitcoin ETF, or a different outcome. However, the SEC retains the option to appeal the ruling.
“The Commission’s unexplained discounting of the obvious financial and mathematical relationship between futures and spot market falls short of the standard for reasoned decision making.”
Grayscale’s victory represents a broader trend of courts challenging perceived regulatory overreach by the SEC in the digital asset space. Industry experts emphasize the endorsement of due process and the potential to establish clearer guidelines for meeting the SEC’s standards for investor protection.
The Grayscale SEC’s case resonates with a recent federal judge’s decision in New York, asserting that another company, Ripple Labs, did not violate the law by selling its token on exchanges. While the SEC intends to appeal that case, subsequent rulings have cast doubt on its approach.
CEO Michael Sonnenshein lauded the incredible impact of Grayscale’s ETF outcome, highlighting its positive implications for investors and the crypto community.
“This ruling is not just about Grayscale’s victory or the first Bitcoin ETF, but sets a precedent for the broader crypto industry.”
Following the ruling, Bitcoin rode a high of a 7% increase, although it experienced a downturn to $27,206 later. The Grayscale EFT outcome paves the way for the first Bitcoin ETF. But let’s first understand what a Bitcoin ETF is.
Grayscale EFT and Bitcoin ETF: Is It A Boon In Disguise?
An exchange-traded fund centered around Bitcoin would provide investors with exposure to the world’s largest cryptocurrency’s market capitalization, without needing to own it directly. The SEC’s rejection of spot Bitcoin ETF applications thus far stems from concerns about safeguarding investors from market manipulation.
The appeals court criticized the SEC for arbitrarily denying Grayscale’s application, specifically questioning why owning Bitcoin directly rather than Bitcoin futures affects the CME’s ability to detect fraud. This critique underscores the need for consistent reasoning in the regulatory process.
This decision may serve as a roadmap for meeting the SEC’s investor protection criteria. Industry experts anticipate other firms, including asset management giants like BlackRock, Fidelity, and WisdomTree, may now consider shifting their surveillance agreements to the CME due to the court’s endorsement of this approach.
However, lawyers caution that the SEC could appeal the ruling, extending the review process by years. Alternatively, the SEC could offer a more specific reason for rejecting Grayscale’s application or similar proposals, potentially leading to a return to the same regulatory conundrum.
Grayscale’s victory joins a series of recent triumphs to the challenges of the SEC’s regulatory approach in the digital asset space, indicating an evolving landscape for cryptocurrency regulation.