Analyzing the SEC’s Appeal and Its Impact on Grayscale Bitcoin ETF Ruling

2023-10-26, 17:16

TL; DR

13 October 2023 is the latest date on which the SEC can appeal against the Grayscale Vs SEC Bitcoin ETF court ruling.

The Company Act of 1940 and The Securities Act of 1933 that govern crypto ETFs mandate the SEC to approve or disapprove spot bitcoin ETF applications.

The SEC has the right to regulate securities including spot bitcoin ETFs.

Introduction

2023 has been a very hectic year for the United States Securities and Exchange Commission (SEC) since it has been handling several lawsuits related to the cryptocurrency sector. For example, it has been involved in legal battles with Grayscale, Coinbase, Binance and Ripple.

Notably, the SEC has lost two essential cases at the moment. It has failed to appeal on the SEC vs Ripple case although it still has a chance to appeal on the recent ruling on Grayscale bitcoin Exchange Traded Funds (ETF).

This post explains the possibility of the SEC appealing against the Grayscale ruling. We will also focus on the legal framework governing cryptocurrency ETFs in the United States. Finally, we will assess the SEC’s role in approving or disapproving crypto ETFs and other securities.

What is a Spot Bitcoin ETF?

Let’s start by defining a spot bitcoin ETF. It is an investment asset that tracks the price of bitcoin. What this means is that if the price of bitcoin increases the value of the ETF rises by a proportionate margin.

On the other hand, its price decreases when the value of bitcoin falls. However, the spot bitcoin ETF is traded on stock exchanges, not on crypto exchanges. Grayscale intends to introduce a spot bitcoin ETF as soon as the SEC approves it.

Possibility of SEC’s Appeal on the Grayscale Court Ruling

The SEC should make an important decision whether or not to appeal against the SEC Bitcoin ETF court ruling. Legally, the SEC is supposed to appeal by 13 October 2023. The failure of the SEC to appeal against the court ruling may increase its chance of approving the Grayscale bitcoin ETF.

Back in August the the DC Circuit Court of Appeals ruled that the SEC should review Grayscale’s application to convert its Bitcoin trust into a BTC ETF. The court ruled that the SEC was arbitrary and capricious in its decision to reject the Grayscale bitcoin spot ETF. The court concluded that the SEC failed to explain why it treated similar products, bitcoin ETFs and bitcoin futures, differently.

Judge Tether Rao said, “The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products.”

Judge Rao added, “Despite these salient similarities, the Commission rejected Grayscale’s proposed bitcoin ETP and approved two bitcoin futures ETPs.”

In other words, the SEC failed to clearly explain how the Bitcoin ETF is less safe than the futures-based funds which it approved in the past. Historically, in 2021 Grayscale applied to convert its Bitcoin trust into a BTC ETF.

Still the SEC rejects Grayscale ETF on the ground that the asset management firm has not implemented sufficient measures to protect the investors against market manipulations. However, Grayscale appealed against the SEC’s ruling with the intention of fighting on until the SEC approves bitcoin ETF.

The SEC maintains that the bitcoin ETF rejected is susceptible to much market manipulation since the underlying asset, bitcoin, is not regulated. It has defended its decision to approve Bitcoin futures ETFs by saying that the Chicago Mercantile Exchange is regulated and has sufficient and proven measures to safeguard the said assets against market manipulation and fraud.

Is There Any Chance for Bitcoin Spot ETF Approval?

Many people still wonder if they will see a Bitcoin ETF approved in the United States. First, some analysts believe that although the SEC may not appeal against the Grayscale vs SEC court ruling, it will come up with ways to delay the approval of Grayscale’s spot Bitcoin ETF.

Although not being specific, Eric Balchunas, a Bloomberg ETF analyst, said that even if the United States Securities and Exchange Commission does not appeal to the SEC Grayscale court ruling it will find a way to delay any bitcoin spot ETF approval.

Balchunas said, “We think [an] appeal is a longshot […] But there’s always a chance of something else happening.” Nevertheless, James Seyffart, another Bloomberg ETF analyst, contradicts Balchunas’ position. He said that although there is no SEC bitcoin ETF decision date, it will eventually approve the Grayscale bitcoin ETF. The latest survey shows a 95% likelihood that the United States Securities and Exchange Commission may approve the Grayscale SEC ETF in 2024.

The Regulatory Framework for Cryptocurrency ETFs

Although there are no laws that specifically deal with cryptocurrency ETFs the existing laws accommodate them. There are several provisions in the Investment Company Act of 1940 which are applicable to cryptocurrency ETFs.

According to the law both the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission have the mandate to regulate crypto related investment products depending on their nature.

The Securities Exchange Act of 1934 also mandates the SEC to regulate all securities. This means that it has the authority to govern crypto ETFs. This is because crypto ETFs are baskets of cryptocurrency related securities. Specifically, The Securities Act of 1933 stipulates that the SEC has the right and obligation to approve or disapprove securities irrespective of their specific categories.

SEC’s Role in Approving and Disapproving Crypto ETFs

As said above, both the Company Act of 1940 and The Securities Act of 1933 mandate the SEC to regulate all securities, an asset class under which crypto ETFs fall. Therefore, the SEC regulates the creation and trading of crypto ETFs. The main aim of the SEC is to protect the investors from market manipulation and frauds.

One of the SEC’s key roles is to approve or disapprove any application for securities, including cryptocurrency ETFs. In addition, the SEC enforces legal compliance to the existing securities laws.

What happens if Bitcoin ETF is approved?

Once it approves a spot bitcoin ETF, the SEC will ensure that its issuer adheres to the reporting requirements as a means to increase transparency and oversight.

Definitely, the ETF will boost the market liquidity of bitcoin as well as increasing its trading volume. As a result, the Bitcoin price is likely to increase in both the short-term and long-term. That will also signify an acceptance of cryptocurrencies by regulatory authorities which may lead to increased adoption.

Conclusion

There is a high likelihood that the SEC may not appeal against the Grayscale SEC ETF ruling. If that happens the chance for the Grayscale spot bitcoin ETF approval becomes higher than before. The SEC uses the Company Act of 1940 and The Securities Act of 1933 when regulating crypto ETFs and other securities.

FAQs about Spot Bitcoin ETFs

Did Grayscale court win over the SEC lifts hope for Bitcoin ETF approval?

The Grayscale court win over the SEC has given the crypto market the hope that its spot bitcoin will be approved. However, there has been a possibility that the SEC might appeal the court ruling by 13 October.

Can the SEC appeal Grayscale?

The SEC has the right to appeal against the court ruling on Grayscale spot bitcoin by 13 October 2023. However, there is a high possibility that the SEC may choose not to appeal against the ruling.

Will the SEC approve bitcoin ETF?

There is a high possibility that the SEC may approve several bitcoin ETFs in 2024. Currently, it is assessing possibilities of market manipulation and fraud in the bitcoin ETF market.

What is the SEC decision on bitcoin ETF?

The SEC has postponed its decision on various bitcoin ETF applications. This is because it is still making its assessment of the suitability of the crypto ETFs. The SEC will give its final decision about bitcoin ETFs in 2024.

Author: Mashell C., Gate.io Researcher

*This article represents only the views of the researcher and does not constitute any investment suggestions.

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