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Portfolio > ETFs

Why the Bitcoin ETF Ruling Is a Big Win

By Dinah Wisenberg Brin

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What You Need to Know

  • An attorney with the Blockchain Association called the ruling an embarrassment for the Securities and Exchange Commission.
  • But the SEC could appeal or revisit the ETF application, experts said.
  • If approved, bitcoin ETFs could account for up to 10% of the cryptocurrency's market value in three years, says Sanford C. Bernstein.

Market and legal experts quickly weighed in Tuesday after a federal appeals court reversed the U.S. Securities and Exchange Commission’s decision to block Graystone Investments’ proposed bitcoin ETF.

The three-judge panel’s unanimous ruling, which Bloomberg called a watershed moment for the cryptocurrency industry, could clear the path for the first spot bitcoin exchange-traded fund in the U.S.

Asset managers have long sought regulatory approval for spot bitcoin ETFs, which would make it easier for investors to participate in the popular cryptocurrency without owning it outright, Reuters noted.

Grayscale seeks to convert its Grayscale Bitcoin Trust to an ETF, for trading on the New York Stock Exchange Arca market.

The case will return to the SEC, market experts indicated. Others noted the commission could appeal the court’s ruling.

Nick Morgan, a partner at Paul Hastings in Los Angeles and a former SEC enforcement attorney, told ThinkAdvisor that the SEC could ask a full panel of the U.S. District Court in Washington, D.C., to review the ruling — known as en banc review — or appeal it to the Supreme Court.  

“If the SEC seeks en banc review, the D.C. Circuit [Court] normally denies [a] rehearing,” Morgan added. 

An analysis from a few years ago, Morgan pointed out, found that “the D.C. Circuit has concluded that rehearing en banc should be rare.” A crypto news outlet, Bitcoin Scoop, tweeted that the SEC could appeal, and if it chooses not to, the court might instruct the commission to approve or to reevaluate the application.

Bloomberg, reporting on the celebration in crypto markets, noted that the Grayscale fund, which trades under the GBTC ticker, rose about 21% after the ruling, surpassing bitcoin, which climbed nearly 7%.

Bitcoin ETFs could constitute 10% of bitcoin’s market value in three years, if ultimately approved, according to Sanford C. Bernstein research, per a Bloomberg article earlier this month.

After Tuesday’s ruling, Bloomberg Intelligence analyst Eric Balchunas estimated the potential market for spot bitcoin ETFs could reach $150 billion, Bloomberg reported.

The appeals panel vacated the 2022 order from the SEC, which had voiced concern about the potential for manipulation in unregulated cryptocurrency markets. A judge wrote that the SEC had been “arbitrary and capricious” in denying the application for a spot bitcoin ETF while approving similar bitcoin futures ETFs.

Grayscale Investments CEO Michael Sonnenshein tweeted that the firm’s legal team was actively reviewing the decision.

Here are several expert reactions to the ruling:

A Complete Rebuke

“This is a complete and utter rebuke of all the SEC’s spot Bitcoin ETF denial orders. There is no wiggle room — basically all of the SEC’s arguments are shot down here. But the (decision) is going back to the SEC. What can the SEC do?” James Seyffart, ETF research analyst with Bloomberg Intelligence, tweeted.

The SEC could start approving spot bitcoin ETF applications but has two options if it wants to deny them, Seyffart said in a follow-up tweet.

The SEC could revoke the listing it approved for bitcoin futures ETFs, given the court ruled the commission couldn’t cite the potential for market manipulation while also approving bitcoin futures products, Seyffart said. He called this move unlikely.

“The second potential avenue is to deny on reasons not used before/yet,” which could involve custody or settlement of bitcoin, “which is not something that futures ETFs have to worry about,” he said, noting “the SEC has made a lot of noise around custodians.”

Massive Victory

Attorney Jake Chervinsky, chief policy officer for the Blockchain Association, called Grayscale’s victory over the SEC “massive.”

“It’s very rare for a federal circuit court to find that an agency has violated the (Administrative Procedure Act) by acting arbitrarily and capriciously. The D.C. Circuit just delivered a huge embarrassment for the SEC. But the ETF isn’t approved yet,” he tweeted.

“The D.C. Circuit soundly rejected the SEC’s view that Grayscale’s ETF proposal was not ‘designed to prevent fraudulent and manipulative acts and practices.’ The SEC has spent a full decade denying spot bitcoin ETF proposals under this reasoning. That era has now come to an end,” Chervinsky said in a follow-up tweet.

“But the court didn’t order the SEC to approve Grayscale’s ETF proposal. It just said the SEC’s analysis on the ‘fraud and manipulation’ issue was wrong. Now, the SEC has to go back and review Grayscale’s proposal again, with the court’s ruling in mind,” he added.

He agreed that it’s possible the SEC will pick a different reason to deny Grayscale’s proposal, spurring more litigation. “It’s hard to understate the extreme hostility of SEC leadership toward crypto. Will Chair Gensler really accept this loss?” Chervinsky said in another tweet.

“But another theory is that the SEC will take the D.C. Circuit’s decision as a [semi-] graceful exit from their anti-ETF position. I’m in this camp. It’s the right move. ‘We disagree, but we’re following the rule of law’ is a convenient excuse to back out of a losing battle, the lawyer added, noting the commission faces political pressure to approve a spot bitcoin ETF.

Chervinsky predicted the market will eventually get a spot bitcoin ETF.

Not Just Grayscale

“Grayscale’s win is a huge victory for all potential spot bitcoin ETFs — not just for Grayscale,” said Roxanna Islam, associate research director at VettaFi, a major ETF research firm, in a statement. “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.”

Spot Bitcoin ETFs Definitely Coming

“Despite the inevitable SEC appeal, to our mind there is no doubt now, spot BTC ETFs are coming to the U.S.,” Tim Bevan, CEO at crypto ETF firm ETC Group, said in a statement.

“We don’t believe the SEC will act as kingmaker and the most likely outcome is a block approval of applications that meet requirements, probably in Q1’24. The level of pent up institutional and retail demand in the U.S. is significant and 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.”

New Pressure on SEC

Alex Adelman, CEO and co-founder of bitcoin rewards app Lolli, said the milestone decision suggests bitcoin ETF approvals may be coming soon from the SEC.

“The SEC’s failure to provide clear, transparent explanations for selectively rejecting and approving materially similar bitcoin-based financial products has created frustration and confusion in the industry, while stagnating growth and innovation,” he said in a statement.

“The ruling will put new pressure on the SEC to be transparent in sharing coherent explanations on its approval process, and help pave the way for products that will make bitcoin accessible to mainstream investors,” he added.

Spot bitcoin ETFs have seen accelerated listings in the EU and elsewhere, Adelman noted, adding that now is the time for the U.S. to make bitcoin available to investors or risk falling behind global powers that already have done so, he added.

Image: Adobe Stock

Dinah Wisenberg Brin

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