The recent decision of the U.S. Court of Appeals for the D.C. Circuit has put the Securities and Exchange Commission (SEC) in a challenging position regarding the approval of a bitcoin exchange traded fund (ETF). The court ruled in favor of Grayscale in a lawsuit against the SEC, which significantly increases the likelihood of a bitcoin ETF being approved. The SEC had previously denied Grayscale’s application to convert its Grayscale Bitcoin Trust into an ETF.
The dilemma for the SEC arises from the fact that the court has rejected the very basis on which the SEC has been denying a spot bitcoin ETF for years. The SEC has maintained that it cannot approve a spot bitcoin ETF because there isn’t a regulated crypto market of sufficient size to prevent manipulation.
However, the court pointed out the SEC’s inconsistency by highlighting its prior approval of a futures-based bitcoin product. According to the court, the futures and spot markets for bitcoin are closely related, and manipulation in either market could impact the price of bitcoin futures. Therefore, the court deemed the SEC’s denial of Grayscale’s proposal as arbitrary and capricious due to the different treatment of similar products.
While the court ruling improves the chances of a bitcoin ETF approval, it does not address the concern over possible manipulation in the market. The court simply highlights the SEC’s error in approving one ETF (bitcoin futures) and not approving another (spot bitcoin).
The SEC now faces crucial decisions. Firstly, it must decide whether to appeal the case, with a 45-day window to make that decision. The harsh tone of the judicial ruling makes an appeal more challenging for the SEC. Depending on the decision to appeal, the SEC has several choices:
1. Approve some or all of the nine applications for a spot bitcoin ETF promptly, complying with the court ruling.
2. Delay the decision as long as legally allowed, with the first deadline being January 10, 2024, based on the filing date of the first applicant.
3. Come up with new justifications for rejecting the ETF application and challenge Grayscale to sue again. The SEC can no longer use the insufficient market size argument, but it could explore alternative reasons.
There is also a possibility that the SEC may consider revoking the approval of the bitcoin futures ETF, although this seems unlikely given its recent approval of leveraged bitcoin futures.
It remains unclear which applicant will receive approval for a spot bitcoin ETF first. Grayscale may not necessarily be prioritized, as the SEC may approve other applicants such as ARK alongside or before Grayscale.
The SEC’s decision to approve bitcoin futures in the past might now be causing some regret. The court ruling has raised questions about the SEC’s consistency and may lead to a significant shift in the regulatory landscape for bitcoin ETFs.
