The bitcoin price has given up gains of around 5% recorded earlier this week after the U.S. Court of Appeals for the D.C. Circuit ruled that the SEC had improperly denied a spot ETF application. The application for an ETF that tracks the spot price of bitcoin, rather than bitcoin futures for which several U.S.-listed ETFs already exist, was made the asset manager Grayscale Investments.
Grayscale says its proposed spot ETF will give investors exposure to the cryptocurrency via regulated brokers and markets rather than the unregulated digital asset exchanges that are currently their only option. The SEC argues that the bitcoin spot price is vulnerable to price manipulation because so much of the cryptocurrency in circulation is held by a relatively small number of accounts.
However, the Court of Appeals ruled the SEC’s rejection of Grayscale’s spot ETF proposal as “arbitrary and capricious”.
Grayscale had applied to convert its current Grayscale Bitcoin Trust vehicle into an ETF.
Jennifer Rosenthal, a spokeswoman for Grayscale, commented on the ruling that boosted the original cryptocurrency to above $28,000 in a statement that read:
“This is a monumental step forward for American investors, the Bitcoin ecosystem and all those who have been advocating for Bitcoin exposure”.
The SEC also released a statement in the aftermath of the ruling, through a spokesman who said the regulator was reviewing the court’s decision to determine next steps. It has 45 days to request another review of the ruling.
The ruling was celebrated across the crypto sector with Ji Kim, head of global policy at the Crypto Council for Innovation, an industry lobby group, emphatically declaring:
“This ruling is not just about Grayscale or Bitcoin, it sets a precedent for the broader crypto industry — this is big, positive and precedent-setting news.”
Bitcoin gains shortlived after SEC pushes back pending decisions on spot Bitcoin ETF applications
However, bitcoin’s gains, and those of the broader crypto market which was also boosted by the development, were short-lived. By late yesterday night in the USA, bitcoin had fallen back from Tuesday’s 2-week highs and was again trading at below $26,000. It has remained at around that level during Friday’s European market hours.
Bitcoin’s drop back to its mid-August price levels came after a late-Thursday filing by the SEC that announced it needed more time to consider the seven spot bitcoin ETFs it is currently due to take a decision on.
The regulator is assessing the applications, two of which are from the mainstream asset management giants BlackRock and Fidelity. The other candidates who hope to offer their clients U.S.-listed spot bitcoin ETFs are WisdomTree, Invesco Galaxy, VanEck, Bitwise and Valkyrie Digital Assets
The crypto sector, and increasingly representatives of the mainstream regulated financial services sector, have been calling for the SEC to approve spot Bitcoin ETFs for almost a decade. It has so far refused, though several futures ETFs have been approved.
Is the SEC losing its long battle against cryptocurrencies?
The current applicants have tried to reassure the SEC, which argues it cannot reassure mainstream investors that the market for bitcoin is not prone to manipulation, by proposing “surveillance sharing” partnerships with Coinbase – one of the largest crypto exchanges. The idea is that Coinbase would raise the alarm in the event of unusual or suspicious trading patterns or price movements on its exchange.
The exchange has accounted for approximately 56% of dollar-to-bitcoin trading on U.S.-based platforms so far this year – which the spot ETF applicants say makes it the best-placed market surveillance partner for U.S.-listed funds.
Coinbase is, however, itself involved in a legal dispute with the SEC which brought cases against it and Binance, another big crypto exchange operating in the USA. The regulator accuses the exchanges of operating as unregulated brokers of securities – which it says cryptocurrencies are.
Coinbase’s case against the SEC was given a boost by another court crypto ruling in the U.S. earlier this month – this time involving Ripple Labs and the XRP token.
The SEC alleged Ripple had sold $1.3 billion worth of XRP tokens to a combination of institutional investors, retail investors and employees it was rewarding in-kind. The SEC further alleged that another $600 million worth of XRP had been sold by two high ranking Ripple executives.
The outcome of the case rested on the SEC’s assessment that XRP should be considered a financial security. If it was, Ripple would have been obliged to file registration statements and various disclosures in relation to the sales and giveaways. It didn’t because Ripple insists XRP is not a security.
US District Judge Analisa Torres ruled that the XRP tokens sold by Ripple Labs to retail investors over cryptocurrency exchanges should not be considered securities. She also ruled that the sales of XRP made by the two executives were not of securities. Nor were XRP distributions to staff, contractors and charities.
It was not a complete victory for Ripple. Judge Torres ruled that XRP sales made to institutional investors did count as security sales. That was due to the implication that the value of the tokens would rise as a result of Ripple’s activities in promoting its blockchain-based payments and settlements solution.
For Coinbase, however, the part of the ruling that declared XRP traded over exchanges as not counting as securities trading, was key. If the judge that eventually rules on the exchange’s case with the SEC follows the precedent, the decision would be expected to come down in favour of Coinbase.
However, were the SEC to win its case against Coinbase, even if that looks increasingly unlikely, it could mean the exchange is no longer able to work with U.S.-based clients or U.S. citizens living elsewhere in the world. That would weaken the position of the ETFs proposing the exchange as a well-positioned fraud surveillance partner.
Final SEC decision on spot bitcoin ETF candidates expected in October
The regulator is now expected to make its decisions on the seven spot bitcoin ETFs it is currently considering in mid-October around the time by which it must decide if it will appeal this week’s ruling.
While there is still scepticism in many quarters the SEC will relent, it is starting to run out of room to manoeuvre after the recent rulings. The bitcoin market manipulation argument has been the crux of its refusals to date. This week’s ruling against the SEC’s position that there is not a sufficiently regulated market bitcoin may have put the agency into a corner.
If it is forced to drop its main argument for refusing spot bitcoin ETFs until now, what does the regulator turn to?
Either way, the next big moment for bitcoin and crypto market observers and traders to watch is that mid-October decision. If spot bitcoin ETFs are finally approved in the USA, prices are likely to soar towards the end of the year.
If the seven applications currently awaiting the SEC’s judgement are rejected again, it could be a tough end to 2023 for cryptocurrencies.