On January 10, 2024, the U.S. Securities and Exchange Commission approved ten spot bitcoin ETFs, marking a significant milestone in the history of the country’s crypto sector. It took 11 years of back-and-forths with regulators and multiple institutional and financial asset managers to finally leverage Bitcoin’s uniqueness as a digital asset. This achievement was made possible towards the end of 2023 because of another milestone, thanks to Grayscale.
Grayscale dragged the SEC to court and won. The asset manager’s victory over crypto’s self-professed grim reaper is quite a significant event in so many ways. But what’s more interesting is the regulator’s decision not to appeal the court’s ruling as many expected it to do. This singular action was instrumental to the eventual approval of the pending ETF applications at the time.
It signals a potential shift in the regulatory landscape and sets the stage for other financial industry giants to enter the market. While this decision offers opportunities, it also raises questions about how the crypto ecosystem will evolve in the United States and what challenges lie ahead.
Let’s track back a bit to how it all started, specifically to the instance when Grayscale won its battle with the U.S. SEC.
Why Grayscale Dragged the U.S. SEC to Court
Grayscale initiated its lawsuit against the SEC in June 2022 after the agency rejected its application to turn its Bitcoin trust, better known by its ticker GBTC, into an ETF. The company decided to pursue the ETF, which would be backed by Bitcoin rather than Bitcoin derivatives. At the time, Grayscale Bitcoin Trust (GBTC) was the world’s largest crypto investment vehicle, and the asset manager was aiming to bring it to the major Wall Street exchanges.
GBTC was a trust, unlike an ETF, which Grayscale wants to convert it to; as it operates with a fixed portfolio and lacks the flexibility to adjust its holdings. Consequently, trusts often trade at varying premiums or discounts compared to the value of their underlying assets.
The SEC rejected Grayscale’s application on the grounds that the products were not “designed to prevent fraudulent and manipulative acts and practices.” Since 2017, at least ten asset managers have sought approval to launch spot bitcoin ETFs, which would give investors a vehicle to buy bitcoin itself rather than derivatives tied to it.
The SEC, then headed by Jay Clayton, rejected them all, maintaining that the tokens, which would be set as the underlying assets in the funds, are traded on unregulated platforms where surveillance is difficult and manipulation a consistent problem.
However, Grayscale filed the Petition for Review, asking the court to review the SEC’s decision to deny their application to convert GBTC to a spot Bitcoin ETF. The court agreed with the asset manager and declared the regulator’s rejection invalid and must be reviewed.
The court said that federal agencies are required by the laws to “treat like cases alike.” These grounds were an inference to the regulator’s earlier decision to grant two bitcoin futures funds. The regulator backed the decision up by saying that these funds are not susceptible to market manipulation like spot ETFs because they would be traded on platforms that are overseen by US financial regulators.
The Implications of U.S. SEC’s Non-Appeal Decision
It was expected that the SEC would appeal the ruling that favoured Grayscale, but surprisingly, it did not. While the reason for this is not exactly clear, it did set the stage for the eventual approval of eleven spot Bitcoin ETFs in January 2024. But more than that, this decision has far-reaching implications, both in terms of the regulator’s stance on digital assets and the potential for further growth and adoption of crypto-related investment products.
Firstly, the SEC’s reasoning for rejecting Grayscale’s application to convert GBTC into a spot Bitcoin ETF—concerns over market manipulation and a lack of surveillance—appeared to be a stretch. The regulator had previously approved Bitcoin futures ETFs, citing their trading on regulated platforms as a safeguard against manipulation. However, the court’s ruling pointed out that the SEC was required by law to treat similar cases alike, undermining the regulator’s stance.
By choosing not to appeal the court’s decision, the SEC tacitly acknowledged the weaknesses in its arguments. The regulator’s line of reasoning is basically trying to shoehorn a new and innovative asset class into existing regulatory frameworks designed for traditional financial instruments. So, the move may signal a potential shift in the SEC’s approach, suggesting that the regulator might eventually concede and work towards developing appropriate rules and guidelines for the crypto industry.
Also, the SEC’s non-appeal decision came on the heels of another high-profile legal battle – the Ripple case – in which the regulator’s position was not entirely victorious. These mounting defeats likely played a role in the SEC’s decision not to pursue further legal action against Grayscale, recognizing the potential futility of such efforts. By conceding this particular battle, the regulator may have aimed to avoid setting unfavourable legal precedents that could undermine its authority in future cases involving digital assets or to preserve its ability to shape the regulatory landscape more effectively in the long run.
The SEC’s non-appeal decision effectively removed a significant barrier to the approval of spot Bitcoin ETFs. This development not only marked a landmark moment for the crypto industry but also signalled a potential shift in the regulatory landscape, opening the door for other financial industry giants to enter the market with greater confidence.
What This Means For Crypto Regulation in the U.S.
The SEC’s non-appeal decision in the Grayscale case has significant implications for the future of crypto regulation in the United States. While the path forward may be arduous, it ultimately paves the way for a more comprehensive and tailored regulatory framework for the crypto industry. Three potential scenarios could unfold, each presenting its own challenges and opportunities.
Scenario 1: The SEC Reconsiders Its Stance on Crypto
If the SEC acknowledges the limitations of applying existing laws and regulations to the crypto industry, it may proactively work towards crafting a suitable regulatory framework. However, this process is unlikely to be straightforward or swift. U.S. lawmakers would need to expedite their efforts to develop and implement new legislation specifically designed for cryptocurrencies and digital assets.
READ MORE: The Cryptocurrencies vs Securities Dilemma: Why U.S. SEC Needs to Revise its Stance On Crypto
The SEC’s willingness to constructively engage with industry stakeholders and solicit input from experts would be crucial in this scenario. By fostering an inclusive and collaborative approach, the regulator could develop rules that balance protecting investors and fostering innovation in the crypto space.
Scenario 2: The SEC Continues to Face Legal Defeats
If the SEC maintains its current stance on crypto and continues to rely on outdated laws and regulations, it risks facing a series of legal setbacks similar to the Grayscale and Ripple cases. In such a scenario, new regulations may be forced upon the regulator through court rulings and precedents.
While this path may be more adversarial and contentious, it could ultimately compel the SEC to reassess its approach and engage in the rulemaking process proactively. Repeated legal defeats could serve as a wake-up call, highlighting the urgency of establishing clear and comprehensive guidelines for the crypto industry.
Scenario 3: Crypto Companies Force Regulatory Change
In the event that the SEC persists with enforcement actions and prevails in litigation battles, crypto companies may be left with no choice but to advocate for regulatory change directly. This could involve lobbying efforts, public awareness campaigns, and leveraging political influence to push for the development of new regulations.
While this scenario may seem confrontational, it could ultimately benefit both the industry and regulators. By bringing stakeholders together and fostering dialogue, a more balanced and inclusive regulatory framework could emerge, addressing the unique challenges and opportunities presented by cryptocurrencies.
Regardless of whatever scenario unfolds, the Grayscale case will likely be remembered as a landmark moment in the history of crypto regulation in the United States. It has shed light on the inadequacies of existing laws and regulations and highlighted the need for a tailored approach that balances innovation and investor protection.
As the crypto ecosystem continues to evolve and mature, establishing a robust regulatory framework will be crucial for fostering trust, attracting institutional investment, and enabling the mainstream adoption of digital assets. The Grayscale case and the SEC’s non-appeal decision have set the wheels in motion, and the industry eagerly awaits the next steps in this regulatory journey.
Bitcoin futures ETFs are seen as a huge regulatory feat for the crypto industry, which has long struggled to cement its place in the highly regulated financial world. Now, after a lengthy battle, the next frontier, Bitcoin spot ETFs, has been conquered. This is essentially big and good news for other crypto-related funds… “The template is here”.
Disclaimer: This piece is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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