The D.C. Circuit Court of Appeals has ruled in favor of Grayscale, a digital asset management firm, in a lawsuit against the U.S. Securities and Exchange Commission (SEC) on the matter of a bitcoin ETF, according to a legal filing on Tuesday.
This ruling is in response to Grayscale’s lawsuit against the SEC, which denied the firm’s application to convert its Grayscale Bitcoin Trust (GBTC) into an exchange traded fund (ETF) on June 29, 2022.
“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” the filing stated. “We therefore grant Grayscale’s petition and vacate the order.”
The court ruled 3-0 in favor of Grayscale, which currently owns 3.4% of outstanding bitcoin, “worth tens of billions of dollars,” according to the filing.
To many in the crypto space, the ruling represents a huge victory. The news was so welcome that within minutes of the courts’ ruling on Tuesday, Bitcoin’s price rose over 7% to nearly $28,000.
“This judicial decision is a monumental step for the whole cryptocurrency sector, including Grayscale,” Yusuf Sevim, CEO of blockchain tech-focused Metatime, told TechCrunch. “It gives a legal and financial stamp of approval, encouraging more traditional investors to venture into the space.” It also set an “encouraging example” that could affect financial markets beyond the United States, Sevim said.
That’s not hyperbole. A company being able to offer a bitcoin spot ETF could allow folks in the traditional financial world to buy into the crypto market using their existing investing services — companies like Fidelity and Vanguard that may hold retirement assets, for example.
Bringing bitcoin to the TradFi market in a manner that is already well-understood from an operational, trading and fee perspective has the potential to unlock lots of demand for the cryptocurrency in the near-term. Such interest could lead to the ETF in question buying more total bitcoin to meet demand, shifting crypto’s supply equation. More demand with flat supply would send the price up, in other words.
When Grayscale’s application was denied a little more than a year ago, Michael Sonnenshein, the company’s CEO, stated that he was “deeply disappointed” and “vehemently disagree[d]” with the SEC’s decision.
Today, Sonnenshein is singing a different tune.
🚨 JUST IN 🚨
The D.C. Circuit ruled in favor of @Grayscale in our lawsuit challenging the SEC's decision to deny $GBTC's conversion to an ETF!
Thank you to everyone who has been on this journey with us, especially our investors. We are grateful for your support and…
— Sonnenshein (@Sonnenshein) August 29, 2023
“This is a monumental step forward for American investors, the Bitcoin ecosystem, and all those who have been advocating for Bitcoin exposure through the added protections of the ETF wrapper,” said Jennifer Rosenthal, a spokeswoman for Grayscale.
Sending a message
This is the latest blow in a series of “losses” for the SEC. Last month, a federal court ruled partially in favor of Ripple Labs and its XRP token, stating that the cryptocurrency is not a security when it comes to public sales but could be considered one in some cases for institutional sales. The SEC is appealing the decision.
“We have now seen a second big digital asset decision go against the SEC,” said Jeffrey Blockinger, chief legal counsel at decentralized exchange Vertex Protocol. “To me, the court system is sending a message that the SEC needs to more carefully understand the limits on its authority and work within those limits.”
This ruling sends a “clear message” from the court that bitcoin spot ETFs are not inherently riskier than other investment products and that the SEC cannot arbitrarily deny their approval, said Steve Rosenblum, CEO and co-founder of crypto risk management platform Libertify.
This move could also open the doors to both individual and institutional investors who were taking a cautious approach to the crypto market, or bitcoin specifically, and have been waiting for regulations to be established. “U.S. courts are legitimizing digital assets through litigation,” Blockinger said.
The court not siding with the SEC also indicates that it may have to consider a more collaborative approach rather than attempting to impose constraints on the crypto world, Sevim said. “This is a watershed moment indicating that the cryptocurrency arena is maturing to a stage where it can’t be easily controlled or sidelined.”
Blockinger added that he doesn’t expect Congress to give the SEC authority over the industry. “It looks like the SEC’s aspirations to control the industry in the near term are diminishing.”
The future of bitcoin spot ETFs
The ruling has wider repercussions for the entire crypto industry, Antoni Trenchev, co-founder and managing partner of Nexo, said. However, he also pointed out that this is just one of the steps needed to unfold favorably for Grayscale’s spot bitcoin ETF to stand a chance of being launched.
As it stands, Grayscale’s GBTC shares trade at an up to 30% discount to the value of its underlying coins, which, the firm estimates, leaves over $4 billion on the table.
This new ruling may also pave the way for other companies that want to launch bitcoin spot ETFs, alongside others like BlackRock, Fidelity, Schwab and WisdomTree.
“Assuming the SEC does not appeal, it is likely to result in quick approval of not only Grayscale’s spot Bitcoin ETF application, but many of the other nine applications pending before the SEC as well,” said Ric Edelman, founder of Digital Assets Council of Financial Professionals. This verdict “significantly increases” the likelihood that the SEC will approve one or more spot bitcoin ETF applications soon, he added.
Trenchev added that the ruling is “undoubtedly bullish” for the possibility of a bitcoin spot ETF and it has expedited the potential for approval.
“The development is game-changing,” Sevim said. “Until now, cautious investors had limited options, but a spot Bitcoin ETF makes cryptocurrency investment more accessible and legitimizes it further.”
Going forward, many crypto players are optimistic.
“The SEC remains the most dominant and pugilistic of all the U.S. financial regulators,” Trenchev said. “What has changed, however, is that crypto companies, including exchanges, funds and token projects, are willing to stand up to have their argument heard. Whether a more collaborative and inclusive regulatory approach will be adopted, only time will tell.”
On another note, bankers, investment advisors and other financial professionals are likely to feel more comfortable recommending bitcoin ETFs to their clients, Rosenblum said.
“The horizon looks brighter than ever,” Sevim said. “This legal victory may well act as the first domino, triggering a series of regulatory relaxations and opening the floodgates for other financial products centered on cryptocurrency.”
Whether or not it will actually create a positive domino effect is anybody’s guess at this time. But investors who were cautious about the space prior to this ruling may view this moment as a big green light to hit the gas pedal and drive into crypto land.
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