Cryptocurrencies surged after a federal appeals court sided with an asset manager that hopes to launch the first bitcoin exchange-traded fund over the objections of the Securities and Exchange Commission.
The decision in favor of Grayscale Investments was a major win for the industry as it pushes for wider mainstream exposure to digital assets. It was a blow to the SEC, which is in the middle of a wider crackdown on the industry.
The price of bitcoin (BTC-USD) rose more than 5%, jumping above $27,000, its biggest one-day jump since June. Coinbase (COIN), the largest crypto exchange in the US, soared more than 13%, while bitcoin mining companies Marathon Digital (MARA) and Riot Blockchain (RIOT) jumped 18% and 24%, respectively.
Asset managers have for years been trying to convince the SEC to approve a spot bitcoin ETF, which would allow investors to get exposure to the world’s largest cryptocurrency without having to own it. The SEC denied the various applications, arguing the products were vulnerable to market manipulation.
Grayscale in 2022 decided to sue the SEC after it wasn’t allowed to convert its Grayscale Bitcoin Trust (GBTC) into a spot bitcoin offering, arguing the agency had already approved exchange-traded products that hold bitcoin futures contracts and thus “acted arbitrarily and capriciously.”
A three-judge appeals panel agreed with Grayscale, saying Tuesday in its decision that Grayscale “advanced substantial evidence” its product was similar to Bitcoin futures ETFs approved by the SEC.
“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” judge Neomi Rao said in the opinion.
The decision could bolster the chances for other asset managers to win approval for their products. The world’s largest money manager, BlackRock (BLK), filed paperwork with the SEC in June to create a spot bitcoin exchange-traded fund. Coinbase would be the custodian for those bitcoin holdings.
This summer other institutional players such as Invesco and WisdomTree Investments have also renewed spot bitcoin ETF applications they had previously submitted to regulators.
“To our mind there is no doubt now spot BTC ETFs are coming to the US,” said Tim Bevan, founder and CEO of UK-based crypto financial services company ETC Group. “The level of pent-up institutional and retail demand in the US is significant.”
The SEC said Tuesday that it is reviewing the new court decision and will decide on its next steps. A Grayscale spokesperson said, “The Grayscale team and our legal advisors are actively reviewing the details outlined in the court’s opinion and will be pursuing next steps with the SEC.”
The SEC is fighting battles with the cryptocurrency industry on a number of other fronts. Since the beginning of 2023, the SEC has charged 17 different crypto actors with violating securities laws, including several exchanges that allow investors to trade digital currencies as well as individual issuers of digital tokens.
The SEC’s core assertion in many of these cases is that cryptocurrencies are securities, and therefore should be registered with the agency.
The courts thus far have not been clear on how digital currencies should be treated.
Analisa Torres, a US judge in the Southern District of New York, said on July 13 that a digital token issued by Ripple Labs was a security only when it was sold to institutional investors, and not when it was purchased by the general public. The SEC had also sued Ripple for selling unregistered securities.
Then July 31, US judge Jed Rakoff disagreed with that specific view in his case, in which the SEC has alleged stablecoin issuer Terraform Labs sold unregistered securities.
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