Grayscale Investments LLC, one of the world’s largest crypto asset managers, has secured an unexpected court win against the US Securities and Exchange Commission (SEC). A three-judge panel in DC’s Court of Appeals in Washington ruled that the SEC’s denial of Grayscale’s proposal was “arbitrary and capricious” in that the SEC failed to explain the difference in treatment between spot bitcoin ETFs and futures bitcoin ETFs.
The landmark ruling is believed to be a boon to an industry fraught with regulatory uncertainty. Grayscale—said to be the equivalent of a crypto Goldman Sachs for large OTC trades—could pave the way for future decisions that favor the first Bitcoin ETF or any product of its kind. Moreover, the court ruling may have set a new trajectory for bitcoin, creating the foundation for the next wave of financial products built on the original crypto asset.
But what does Grayscale’s legal victory mean for retail investors, institutions, bitcoin price, the broader crypto sphere, and the markets? Is it genuine cause for optimism, considering the crypto industry has faced significant blows to its image since 2022, which included scandals among well-known projects and exchanges, resulting in severe government pushback? Could it be something to look forward to after Bitcoin has been trading sideways for quite a while now?
The court victory is the second legal triumph for the crypto industry in recent months. In July 2023, A judge ruled in favor of Ripple Labs, stating that the company did not violate federal laws by selling its XRP token on public exchanges.
Bitcoin, however, sets itself apart as an asset as it is not considered a security by most government laws, unlike other crypto tokens with more centralized issuance and governance. Given the proper framework, it can also become an important reserve currency. Some analysts believe the recent developments concerning Grayscale have increased the probability of a spot bitcoin ETF approval.
What’s next for bitcoin ETFs? The future depends on how SEC Chair Gary Gensler decides to play it. Does he capitulate or fight till the end? Gensler and the SEC have several options.
First, the US SEC can choose to appeal the case. If it does, the order will be stayed until a decision is made on the appeal. Afterwards, the regulator is given 45 days to decide. The SEC can take this route. However, the stern ruling will appeal to a more challenging option.
The SEC’s succeeding options hinge upon their decision to appeal. As their next move, they could approve all or some of the spot Bitcoin ETF applications already lined up. Besides Grayscale, financial behemoths like BlackRock, VanEch, WisdomTree, Valkyrie, Fidelity, Invesco, and Ark/21 Shares have lined up their Bitcoin ETF applications. Approving one or all of these applications could be a watershed moment for Bitcoin and crypto.
If the SEC decides to continue its hostile stance, it can choose to delay as long as possible or as permitted by law. The SEC has a window of 240 days to approve or deny ETF applications. Ark’s is the earliest application among the institutions this year, published in the Federal Register on May 15. This date means the SEC must decide on the first application by January 10, 2024.
The third option for Gensler and the SEC would be to spin a new rationale for denying the application. This new approach will push Grayscale to sue again. The previous argument—that the market size for a spot Bitcoin ETF was insufficient to prevent manipulation—can no longer be used.
The last option for the US SEC is to kill the bitcoin futures ETF. In theory, this scenario is possible but unlikely because the SEC recently approved leveraged bitcoin futures and thus would find it inconvenient to backtrack on its decision.
Should a spot Bitcoin ETF be approved, the decision would impact crypto and finance unprecedentedly. The following are likely scenarios:
More than a regulatory development, a spot Bitcoin ETF approval could open a floodgate of opportunities and revitalize the markets. ETFs make investing more accessible. They make trading easier on traditional stock markets.
A spot Bitcoin ETF would simplify access to Bitcoin without the technological complexities such as managing digital wallets and trading bitcoin on retail exchanges. Those not interested in learning the technical side or keeping their Bitcoin in self-custody will benefit from this new financial product. Moreover, the added protections of an ETF wrapper could appeal to more conservative participants. This development could introduce a wave of new investors into the crypto markets.
Retail investors are often limited because they can be excluded from significant opportunities in markets due to minimum required investment, the need for specialized knowledge, and technical barriers.
Bitcoin ETFs can transform retail access to Bitcoin by simplifying it. A retail investor can purchase an ETF share through a traditional brokerage account. With this simple purchase, one can gain exposure to bitcoin price movement, thus becoming the gateway to new investment opportunities. Regardless of the brokerage account size or geographic location, individuals can access the world’s best-performing asset over the last decade without learning new skills.
The markets could respond favorably to the news of a bitcoin ETF approval. Bitcoin immediately responded to the report of Grayscale’s court victory by registering a 6 percent jump. However, that was more of a knee-jerk reaction, which could not be sustained without solid footing.
A proper ETF approval could send the price upwards by communicating a message of institutional acceptance, regulatory clarity, and legitimacy. The new regulatory status of spot bitcoin ETFs could shift the sentiment among retail investors to a bullish one. The speculation around the influx of new retail investors and the possible entry of more institutional capital could influence the price.
Institutional investors are hesitant over new asset classes, and Bitcoin is no different. ETFs provide the regulatory oversight, custodial services, and liquidity necessary for institutions to invest entirely in crypto. With these new protections underway, the institutional interest could skyrocket, thus unlocking billions of dollars of institutional capital. ETFs represent a crucial regulatory on-ramp to crypto markets.
Grayscale’s Court Win: Prelude To A Paradigm Shift?
While Grayscale’s unexpected court victory against the US SEC is a positive signal on the way to a spot Bitcoin ETF approval, it is not a guarantee that a spot ETF will happen. However, it does narrow the legal obstacles towards a Bitcoin ETF in the foreseeable future. In the speculative journey that is the crypto markets, the victory is cause for cautious optimism and encourages financial institutions to pile on their applications.
Currently, the crypto markets are in a slump. Trading volumes are low. On centralized exchanges, the cumulated volume for August 2023 was $400 billion, the lowest since December 2020. News like Grayscale’s win over the SEC argument signals a shift in regulatory adoption in the US and is highly welcome in the languishing cryptosphere.
Several of the world’s largest asset managers already want in on the action. Multi-trillion-dollar BlackRock sent shockwaves through the industry by filing its Bitcoin ETF application, causing other prominent asset managers to follow suit.
Should one or all of these bitcoin ETF applications be accepted by regulators, it will signal a transformative event in bitcoin and crypto history—one that could mirror the impact of the first gold ETF. For now, however, it indicates an escalation of the battle between crypto giants or financial innovators and regulators, wherein the best arguments and the most determined proponents prevail.
With this new development, we could stand on the cusp of a new era of Bitcoin and crypto investments. Keeping track of the moving landscape and adapting investment strategies is essential.
This is a guest post by Ivan Serrano. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
