Recent developments have brought the long-debated issue of a spot Bitcoin ETF to the forefront, leaving the SEC facing a significant conundrum. The U.S. Court of Appeals for the D.C. Circuit's decision in favor of Grayscale in their lawsuit against the SEC marks a pivotal moment, potentially clearing the path for the approval of a Bitcoin exchange-traded fund. This decision overturns the SEC's previous denial of Grayscale's application to transition its Grayscale Bitcoin Trust into an ETF.
A Paradigm Shift
The crux of the SEC's argument against a spot Bitcoin ETF had hinged on the absence of a regulated crypto market substantial enough to thwart potential manipulation. However, the recent court ruling directly challenges this stance. It points out the SEC's prior endorsement of a futures-based Bitcoin product, emphasizing the parallel nature of futures and spot markets. In essence, the court insists that approving one necessitates the approval of the other, underscoring their intrinsic connection.
The court's verdict resounds with a compelling assertion: "Because the spot and futures markets for bitcoin are highly related, it stands to reason that manipulation in either market will affect the price of bitcoin futures."
A Legal Watershed
The appeals court further asserted that the denial of Grayscale's proposal was "arbitrary and capricious" due to the Commission's failure to elucidate its differential treatment of comparable products.
Nevertheless, the ruling doesn't dispel concerns about potential market manipulation. It merely acknowledges an inconsistency in the SEC's approach, endorsing one ETF (bitcoin futures) while withholding approval for another (spot bitcoin).
Navigating the Path Forward
The pivotal question now lies in the hands of SEC Chair Gary Gensler – will he choose to acquiesce or to confront this legal crossroads?
The SEC is confronted with a series of crucial decisions:
1. Appeal or Accept: The first decision is whether to contest the ruling. An appeal would entail a stay on the order until a verdict on the appeal is reached. This choice carries a 45-day window for the regulator to deliberate. While an appeal remains an option, the court's stern tone certainly complicates this path.
2. Approval Process: Depending on the stance taken regarding the appeal, the SEC faces further choices:
a) Swift Approval: The SEC could align with the court's ruling and issue an order authorizing the listing of the Grayscale ETF on NYSE Arca, or approve other pending applications.
Notable Applicants:
- Grayscale Bitcoin Trust
- Ark/21 Shares Bitcoin Trust
- Bitwise Bitcoin ETF Trust
- BlackRock Bitcoin ETF Trust
- VanEck Bitcoin Trust
- WisdomTree Bitcoin Trust
- Valkyrie Bitcoin Fund
- Invesco Galaxy Bitcoin ETF
- Fidelity Wise Origin Bitcoin Trust
b) Delay Tactic: The SEC can employ the maximum allowable time frame of 240 days to deliberate on the pending applications, with the initial deadline set for January 10, 2024.
c) New Rationale: The SEC could endeavor to establish fresh grounds for non-approval, although specifics on such arguments remain ambiguous.
d) Abolishing Bitcoin Futures ETF: While a theoretical option, it's improbable, especially given the recent approval of leveraged bitcoin futures.
Who Takes the Lead?
Anticipating the arrival of a spot Bitcoin ETF doesn't necessarily guarantee Grayscale a front-row seat. The SEC may choose to greenlight ARK first, or perhaps endorse all applications concurrently.
In Retrospect
One cannot help but wonder if the SEC is now second-guessing their decision to endorse bitcoin futures, given the current legal landscape surrounding spot Bitcoin ETFs. The coming months promise to be pivotal in determining the trajectory of cryptocurrency investment options in the U.S. financial market.
