The U.S. Court of Appeals for the D.C. Circuit has enabled the possibility of bitcoin exchange-traded funds as they sided with Grayscale in a legal dispute against the Securities and Exchange Commission which had refused the company's application to transform the Grayscale Bitcoin Trust into an ETF.As a result of the news, bitcoin, ether, and other major capitalization crypto coins experienced an uplift, with Coinbase at the forefront, raising more than 14% on Tuesday; Coinbase is listed as the custodian partner in various applications for spot bitcoin ETFs.
The United States Court of Appeals for the D.C. Circuit has opened the pathway for exchange-traded funds based on bitcoin. On Tuesday, the court declared in favor of Grayscale who filed a lawsuit against the Security and Exchange Commission (SEC) after the agency declined their application to convert their Grayscale Bitcoin Trust into an ETF. The verdict might have implications for other companies who have plans to launch bitcoin ETFs, including BlackRock and Fidelity.
A spot bitcoin ETF, which would be traded on a traditional stock exchange, would give investors access to the biggest cryptocurrency in the world without needing to own it themselves. Supporters of cryptocurrency anticipate that acceptance of a spot bitcoin ETF could lead to larger-scale institutional approval.
The news caused a surge in the prices of bitcoin, ether, and other major cap crypto coins, leading to Coinbase stocks jumping 14% by Tuesday. The court cited the SEC’s contravention of the law in allowing two bitcoin futures ETFs but vetoing Grayscale’s bitcoin ETF, noting that “the Commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale's proposed bitcoin ETP”.
Grayscale Investments, manager of the largest crypto fund globally, initiated the lawsuit against the SEC in June 2022 subsequent to the agency's refusal of their application to switch their flagship bitcoin fund (commonly referred to by its ticker GBTC) to an ETF. The prospect of an ETF backed by bitcoin rather than bitcoin derivatives motivated the company to make the bid after observing the SEC’s green light to ProShares' futures-based bitcoin ETF in October 2021.
The ruling, which went through numerous postponements, was eventually rejected by the SEC last summer over worries of market manipulation and investor protection. After the court's decision, a statement from the SEC mentioned that they are currently examining the ruling to determine their next actions.
A spokesperson from Grayscale shared that Tuesday’s ruling marks 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". They further added that the Grayscale team and their advisors are currently reviewing the opinion and will follow up with the SEC to share more information soon.
An expert has commented that the SEC enforcement action is essentially finished. "The bottom line is that, while the SEC can attempt to take the case to the Supreme Court, they have no other means to deny Grayscale's application," stated Renato Mariotti, a former federal prosecutor in the Securities and Commodities Fraud Section of the United States Attorney's Office - presently a trial partner in Chicago with Bryan Cave Leighton Paisner. "If the SEC altered their justification for denying their application, it would seem even more arbitrary. The SEC has already presented their strongest argument, and the Court of Appeals indeed rejected it," continued Mariotti.
Nic Carter of Castle Island Ventures concurs, saying that, while the SEC could go back and try to deny the application on alternate grounds, the best subsequent step is for the bureau "to accept the verdict as a way to 'save face' and allow the spot ETF in a manner that illustrates they dissent with the decision but regard the court's ruling." Dave Weisberger, CEO of CoinRoutes, advised CNBC it could even present SEC Chairman Gary Gensler a political victory - a spot bitcoin ETF would grant the regulator some management of the bitcoin spot market though the token is not taken into consideration a security.
GBTC, with $16 billion in assets under management by Tuesday, was the primary crypto product investors could trade in their brokerage accounts to gain access to bitcoin. It was initiated in 2013, well before the endorsement of bitcoin ETFs in Canada or bitcoin futures ETFs in the U.S. Grayscale charges a 2% annual fee to investors, making it a financial benefit for parent company Digital Currency Group, led by Barry Silbert.
"It essentially guarantees they will accept BlackRock and Fidelity," remarked Dave Weisberger, CEO of CoinRoutes, a platform that provides algorithmic trading and consolidated market data products for digital assets across multiple exchanges and liquidity providers. "Grayscale may need to refile, but they will almost certainly be accepted also."
Firms have been submitting applications for spot bitcoin ETFs for over two years, yet thus far, the SEC has rejected more than 30 proposals since 2021 - a 100% refusal rate. Nevertheless, investor attitude was raised in June when BlackRock, the world's largest asset manager with about $9 trillion in assets under management, submitted an application. The firm has had all but one of its prior 575 ETF applications approved. — CNBC's Jordan Smith contributed to this report.
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