In a year when it has seemed that US officials were determined to put much of the cryptocurrency market out of commission, the beaten-down digital asset industry has finally scored a significant legal win.
A US appeals court’s ruling to overturn the Securities and Exchange Commission’s decision to block the first exchange-traded fund tied to the spot price of Bitcoin sent the original cryptocurrency soaring more than 7 per cent, its biggest daily gain in months.
It boosted spirits in a sector contending with a near-constant blast of high-profile regulatory enforcement actions, bankruptcies and legal battles.
While it is only one victory against the US in a multipronged campaign, the win by Grayscale Investments shows that the SEC’s approach to policing the grey legal areas of cryptocurrency – what Coinbase Global has called “regulation by enforcement” – is far from foolproof.
Judge Neomi Rao wrote that the regulator’s denial of the ETF was “arbitrary and capricious” because the SEC had failed to explain its different treatment of similar products.
“This ruling is not just about Grayscale or Bitcoin. It sets a precedent for the broader crypto industry,” Ji Kim, general counsel and head of global policy for the Crypto Council for Innovation, said.
“This is big, positive, and precedent-setting news. It provides the obvious reminder that it is critical for regulators to provide much-needed clarity and rationale when making such critical determinations affecting such a significant industry.”
To be sure, the SEC will probably fight the ruling. The ultimate outcome of the case will have little bearing on other parts of the US clampdown on cryptocurrencies, including the watchdog’s legal case against digital-asset exchanges Coinbase and Binance Holdings for allowing trading of other tokens the regulator claims are unregistered securities, among other things. Both companies dispute the SEC’s legal claims.
Recall that a July ruling in another case between the SEC and Ripple Labs led to a similar market pop because it was widely viewed as cryptocurrency-friendly.
But then the SEC moved to appeal and a judge in a separate case sent a conflicting signal, dousing the optimism and making the outcome much less clear.
Tuesday’s court action potentially moves Bitcoin closer to more widespread acceptance in the traditional investment industry.
The court’s decision leaves “no doubt” that spot Bitcoin ETFs are coming to the market, probably in the first quarter of 2024, said Tim Bevan, chief executive at cryptocurrency exchange-traded product provider ETC Group.
In addition to Grayscale’s attempt to convert its closed-end mutual fund into an ETF, the SEC has also received 10 other Bitcoin ETF applications, including from BlackRock, VanEck Digital Assets, WisdomTree Digital Commodity Services and Invesco Capital Management – a number of which have deadlines looming right before this weekend's Labour Day holiday.
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“We don’t believe the SEC will act as kingmaker,” Mr Bevan said. “The most likely outcome is a block approval of applications that meet requirements.”
The potential total market for spot Bitcoin ETFs could be somewhere in the neighbourhood of $150 billion, similar to the amount of assets in gold ETFs, according to Bloomberg Intelligence analyst Eric Balchunas.
With financial advisers overseeing $30 trillion in assets in the US, it would only take an allocation of about 0.5 per cent to swell Bitcoin ETFs to $150 billion, he said.
“The other thing you have to know is advisers are scared about this transfer of wealth from the Boomers” to the younger generations, Mr Balchunas said on a recent episode of the What Goes Up podcast.
“The advisers are going to want to look hip and cool to what the younger people want,” he said.
