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SEC Hesitant; Delays ETF Rulings as Grayscale Wins Lawsuit

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By Landon Manning

The hotly-anticipated Bitcoin ETF has seen contentious developments, as Grayscale wins a challenge against the Securities and Exchange Commission (SEC), and the price of Bitcoin has fluctuated wildly in response.

A Bitcoin spot Exchange-Traded Fund (ETF) is a long-running dream in the crypto community, something of a crowning achievement for the ongoing reconciliation of traditional finance and financial regulators with the new economic vision of Bitcoin. Essentially, the Bitcoin spot ETF would enable investors to purchase a financial instrument whose value is directly correlated with Bitcoin, making it extremely more accessible to all sorts of markets. A futures ETF, where the fund’s value is determined by some calculated assessment of Bitcoin’s potential gains, has already been approved and is popular, but is still a far cry from an investment product directly tied to the decentralized cryptocurrency.

ETFs are frequently bundled with diverse types of assets for everything from corporate investments to pension funds, and the possibility of such an instrument’s approval has always corresponded with an increase in the price of Bitcoin. Although millions of new users would not be able to use Bitcoin itself for daily transactions, the exposure and economic power behind such a development would be a monumental shot in the arm. 

The SEC has been delaying judgements on a wide run of proposals for months now, and hype and disappointment have been predominating cyclically. Towards the end of August 2023, rumors of an SEC “crusade” against crypto circulated after the Commission’s campaign against Binance, and former executives were publicly claiming that an ETF approval seems very unlikely. And still, even in this atmosphere of relative pessimism, prominent figures like Marathon CEO Fred Thiel pointed out potential advantages. Noting that some of the world’s largest asset managers have submitted these SEC proposals, Thiel said that he doesn’t “know about giving out odds on something like this, because the fact that Larry Fink and BlackRock are even trying to do this would say that they have a pretty high degree of certainty that they'll get it through.” He would not claim that he saw better than even odds of an immediate approval, but Thiel did add that “I think what is certain is that if one gets approved, a number of them will get approved.”

By August 29th, a bombshell dropped as one of the many applicants scored a major win against the SEC: the US Court of Appeals for the D.C. Circuit ruled in favor of Grayscale in their lawsuit, which had been ongoing since 2022. This ruling claimed that the SEC’s stated reasoning to reject spot ETF proposals is “arbitrary and capricious”, as the SEC has already approved the futures ETF. If the crypto market is too unstable and unregulated to approve this type of investment, as the SEC has claimed, then it would stand to reason that a very similar type of proposal would also fail. Naturally, this immediately led to a rally in the price of Bitcoin and other cryptoassets. 

This position left the SEC with several options: concede and approve some or all of the pending proposals, retract their approval of the Bitcoin futures ETF or come up with a new rationale for continuing to reject the spot ETF. It seems as if the SEC is not prepared to acquiesce, as it delayed a decision for all applicants until October. Buying time, in other words, but for what? It is presently unclear what the SEC’s next move is, whether they intend to fight tooth and nail or demand concessions for an approval, but a defeat in the Grayscale case seems to have rattled them. 

Ultimately, until these new deadlines come up in mid-October, there is little way of knowing what the future has in store for the Bitcoin spot ETF. However, there are several points that a savvy investor should consider: first of all, the SEC has suffered a defeat here. If it wishes to continue its opposition, it will have to decide on a new reason to reject these proposals, and open itself up to lawsuits from any or all of the applicants. These applicants include some very powerful players, like the world’s largest asset manager, BlackRock, which manages some $8.5 trillion worth of assets. Additionally, although the SEC can claim to be cracking down on sketchy business practices elsewhere in the crypto sphere, the fact remains that it has publicly lost momentum here. On September 1st, former SEC chair Jay Clayton told CNBC that “approval is inevitable.” As the world of crypto moves closer and closer to its long-term goal being realized, it seems clear that Bitcoin is picking up speed.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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