The SEC has been instructed by the US Court of Appeals to review its decision on Grayscale Investment’s request to transform GBTC into a Bitcoin ETF. The victory is no less than a milestone, and markets have also reacted positively to the ruling.
This is the second major setback for the financial regulator, whose boss has been hell-bent on pursuing enforcement action against the crypto industry while failing to offer meaningful regulatory clarity.
Will Gary Gensler and SEC Accept Defeat?
The US Securities and Exchange Commission (SEC) has spent a decade denying spot Bitcoin ETF proposals under the reasoning that it is “designed to prevent fraudulent and manipulative acts and practices.”
But this era has now come to an end, according to prominent lawyer and Variant Fund advisor Jake Chervinsky, who said that the ruling is very rare for a federal circuit court to find that an agency has violated the APA by acting “arbitrarily and capriciously.” He further went on to add that the DC Circuit just delivered a “huge embarrassment” for the SEC.
But there’s a catch.
A much-anticipated spot Bitcoin ETF hasn’t launched yet. The court has not ordered the SEC to approve Grayscale’s ETF proposal. Chervinsky explained that the ruling only determined that the SEC’s analysis of the “fraud and manipulation” issue was wrong.
1/ Grayscale’s victory over the SEC is *massive.*
It’s very rare for a federal circuit court to find that an agency has violated the APA by acting arbitrarily and capriciously.
The DC Circuit just delivered a huge embarrassment for the SEC.
But the ETF isn’t approved yet 🧵
— Jake Chervinsky (@jchervinsky) August 29, 2023
Scenarios
A possible scenario is that the SEC might find an alternative justification to reject Grayscale’s proposal, leading to further extended and expensive legal battles. Chervinsky believes this to be a viable option considering “the extreme hostility of SEC leadership toward crypto.”
Another theory involves the agency taking DC Circuit’s decision as a “(semi-)graceful exit from their anti-ETF position” and backing out after losing the battle. Chervinsky said that this would be the “right move.”
The political pressure on the SEC to approve spot Bitcoin ETFs also begs attention. The lawyer pointed out that the ruling isn’t just about the asset management giant and added that all of TradFi is ready for a bitcoin ETF.
Several firms have filed spot Bitcoin ETFs for listing on Nasdaq or CBOE Global Markets this year. It includes BlackRock, the world’s largest asset manager, whose CEO Larry Fink is often considered one of the most powerful players in global finance, who “throws heavy punches in DC.”
While Chervinsky believes a spot Bitcoin ETF is imminent, the financial regulator must anticipate another lawsuit if it continues to play harder.
“I have no doubt that we’ll get a spot Bitcoin ETF sooner or later. The only question is if the SEC wants to make this more painful for itself. Trust me, if there’s another denial, there will be another lawsuit.”
Industry observers have echoed a similar stance and believe the latest ruling has left the SEC with “very little wiggle room.” In fact, prominent Bloomberg ETF analysts Eric Balchunas and James Seyffart have upped the odds of a potential spot Bitcoin ETF’s launch to 75% by this year and 95% by the end of 2024.
Grayscale’s Win Rattles Peter Schiff’s Pessimism
Unsurprisingly, Bitcoin critic Peter Schiff warned that Grayscale converting its GBTC to a spot Bitcoin ETF if approved, could be bearish for the cryptocurrency. He claimed that the ability of traders to exploit price differences, the elimination of NAV discounts, and the potential selling of Bitcoin by GBTC shareholders could collectively drag BTC’s price down.
Founder of BlackTower Capital, Ari Paul, responded to Schiff’s comment suggesting that while there might be some selling pressure from the GBTC unlocking process, the net impact on the Bitcoin market could be minimal due to the excessive fees currently paid by GBTC investors.
The exec also added that the introduction of a Bitcoin ETF could bring in more significant positive effects by attracting new investors into the market.
SEC Deadlines
Following the unanimous ruling, the SEC is nearing its deadline on seven Bitcoin ETF applications. Bitwise is expecting a decision on September 1 regarding the approval of its ETF. BlackRock, VanEck, Fidelity, Invesco, and WisdomTree will all be looking forward to the SEC’s decision on their respective fund applications on September 2nd, as stated in various SEC filings.
Next up is Valkyrie, which is expected to receive a response on September 4th for the same.
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