The court’s ruling in favor of Grayscale’s investment gives a major boost to the cryptocurrency industry’s decade-long effort to launch an exchange-traded fund that tracks bitcoin, even if it doesn’t immediately open the floodgates for such products.
A three-judge panel of the Court of Appeals for the District of Columbia in Washington ruled on Tuesday that the U.S. Securities and Exchange Commission erred in rejecting Grayscale’s proposed Bitcoin ETF without explaining its reasons, in a case that has been closely watched by the industry.
The ruling requires the SEC to review Grayscale’s application, meaning there’s no certainty it would have reached a different conclusion and approved the product. The regulator said on Tuesday it was studying the ruling and may appeal.
Executives and lawyers said it still supports the right of the cryptocurrency industry — which is reeling from a massive crackdown by the U.S. Securities and Exchange Commission — to comply with due process and provided more clarity on how to satisfy investors at the SEC. protection standards.
This is the second major victory for the industry, after a New York federal judge ruled in July that Ripple Labs did not violate the law by selling its tokens on exchanges. The SEC will appeal the case, which is on shaky ground after subsequent rulings called into question its practices.
“This decision is yet another example of U.S. courts pushing back against the SEC’s regulatory overreach in the digital asset space,” said Christopher LaVigne, co-chair of Withers LLP’s cryptocurrency practice.
The SEC declined to comment Wednesday. Grayscale CEO Michael Sonnenshein told CNBC on Wednesday: “This is a huge win for us, our investors, the crypto community and the entire investment community.” Bitcoin rose about 7% on Tuesday, but gave back Wednesday Partial increase. The final price was $27,206.
A spot Bitcoin ETF would give investors exposure to the world’s largest cryptocurrency by market capitalization without owning it. The U.S. Securities and Exchange Commission has rejected all applications for spot Bitcoin ETFs, saying applicants have not demonstrated they can protect investors from market manipulation.
However, it has approved a Bitcoin futures ETF under a market surveillance arrangement with the Chicago Mercantile Exchange (CME), where most Bitcoin futures trade. Grayscale believes the same setup should be satisfactory for its spot ETFs, as both products rely on Bitcoin’s underlying price.
The appeals court ruled that the SEC arbitrarily denied Grayscale’s application because it “never explained why Grayscale’s ownership of Bitcoin but not Bitcoin futures would have affected CME’s ability to detect fraud.” CME had no immediate comment on the decision.
Sui Chung, CEO of CF Benchmarks, the UK regulatory index provider for other proposed Bitcoin ETFs, said the ruling clarified that cryptocurrency companies seeking to launch regulated products “should be afforded exactly the same due process as offering established products. and consideration”. securities.
“Potential roadmap”
Court recognition of CME arrangements also provides a potential path to meeting SEC investor protection standards.
“It won’t be immediate, but it’s important because it could provide a potential road map to a successful product,” said WilmerHale attorney Joseph Toner, a former SEC official.
Other companies have also filed with the SEC for spot Bitcoin ETFs, including asset management giants BlackRock (BLK.N), Fidelity and WisdomTree (WT.N). They proposed a surveillance arrangement with Coinbase Global (COIN.O), the largest U.S. cryptocurrency exchange.
Some executives said CME Group’s arrangement could be more attractive after Tuesday’s ruling.
Seth Hertlein, global head of policy at crypto wallet Ledger, said: “I wouldn’t be surprised to see many applicants trying to shift surveillance protocols to CME.”
BlackRock and Fidelity declined to comment. “While we monitor the news closely, we are very focused on having meaningful and collaborative conversations with regulators,” said WisdomTree Chief Legal Officer Ryan Louvar.
Coinbase chief legal officer Paul Grewal said Grayscale’s ruling was “an important step toward the transparency the industry needs.” Coinbase intends to pursue its proposed oversight-sharing agreement for companies that have applied for a spot Bitcoin ETF, according to a person familiar with the matter who spoke on condition of anonymity.
Lawyers warned that the SEC could appeal, which would bring the case to the full appeals court or the Supreme Court for review, delaying a final decision for years. Withers’ LaVigne said that if the SEC doesn’t appeal, it could offer more specific reasons to deny Grayscale’s application again or something similar
“We may find ourselves back on the same merry-go-round,” he added.
