An asset manager’s court victory in its bid to launch a cryptocurrency spot ETF has put the Securities and Exchange Commission on the defensive. But it’s still too early to call this a fight. Cryptocurrency enthusiasts use terms like “watershed,” “tipping point,” and “Rubicon” to refer to the Grayscale v SEC ruling. This is not unjustified as it could lead to the SEC capitulating and opening a virtuous upward spiral in cryptocurrency prices and legal acceptability. But it’s also far from certain because the direct practical impact of this decision is minimal. The SEC’s ruling in favor of Grayscale Investments LLC has reignited hope that an exchange-traded bitcoin fund will soon be available. Bitcoin prices jumped.
Cryptocurrency enthusiasts use terms like “watershed,” “tipping point,” and “Rubicon” to refer to the Grayscale v SEC ruling. This is not unjustified as it could lead to the SEC capitulating and opening a virtuous upward spiral in cryptocurrency prices and legal acceptability. But it is also far from certain because the direct practical impact of this decision is very small. The game began near the end of 2017 when the Commodity Futures Trading Commission used its authority to allow the Chicago Mercantile Exchange to begin trading Bitcoin futures. It took more than five years for the SEC to approve the first bitcoin futures ETF — and it was difficult for the agency to allow futures ETFs for stocks, bonds, and commodities, but not crypto assets. Grayscale then argued that its proposal for a spot Bitcoin ETF was so similar to already approved Bitcoin futures ETFs that the SEC was arbitrary and capricious in rejecting its application.
SEC Forecast: The Future of Bitcoin
This in no way paves the way for a spot Bitcoin ETF. The SEC can appeal the decision. They can also accept the decision but reject the Grayscale application for other reasons. Most importantly, the battlefront has changed and from now on the SEC is on the defensive. I expect the SEC to focus on setting the terms of a peace treaty to end the fighting rather than trying to maintain its stance against cryptocurrency exchange-traded funds. (Disclosure: I am an active cryptocurrency investor, and have venture capital investments and advisory relationships with cryptocurrency companies.)
I think the SEC feels more comfortable with spot bitcoin ETFs run by larger asset managers, like BlackRock Inc. and Fidelity Investments, digital asset specialists like Grayscale. The most likely scenario seems to be that the SEC will accelerate applications from large traditional asset managers rather than focus on Grayscale’s implementation.
Why does this matter? It’s easy for retail investors to buy Bitcoin directly or via closed-end exchange-traded funds like Grayscale. With more trouble, they can speculate on Bitcoin prices indirectly using futures, options, or funds based on those derivatives. However, it is likely that many new retail investors will be attracted to the convenience and familiarity of purchasing ETFs through traditional large brokerage firms.
Futures and investment funds in light of financial volatility
Futures contracts exist in net zero supply, for every buyer there is a seller. But spot bitcoin ETFs will hold bitcoins in a positive supply, removing bitcoins from the market for other uses. If the demand for those other uses remains the same, the price of bitcoin should rise, since the total amount of bitcoins is irreversibly fixed by the algorithm. Moreover, Bitcoin has no anchor value – no use value to cushion its price fluctuations – so even small changes in the supply-demand balance can lead to large price changes. There is another reason for the increase.
If ETF holdings are reasonably large and stable — at least compared to volatile cryptocurrency flows — that could give Bitcoin more confidence and support, in the same way that central bank reserves give investors’ confidence in traditional currencies. Large-scale retail holdings via ETFs are also creating a broader political base for pro-cryptocurrency regulation.
Cryptocurrency fans tend to be optimistic, and many of them are already mentally traveling down this road to anticipate significant bitcoin price increases in the near future. Traditional investment analysts are more skeptical. They realize that there are many uncertain steps between this court ruling and the lasting peace between cryptocurrency and traditional financial regulation. Moreover, cryptocurrencies have always been willing to present scandals and disasters to stifle progress toward acceptance.
The impact of Grayscale v SEC on cryptocurrencies
Another important consideration is that while the SEC has been taking over and producing most of the news about regulating cryptocurrencies, Congress – which outstrips the SEC – has been steadily working on the issue. They are also less restricted by federal courts. Most cryptocurrency enthusiasts expect help from Congress if partisan sentiment cools off after the 2024 election. But politics are as volatile as cryptocurrency prices, and things could change. International regulation and practices are also of great importance.
Shakespeare made Richard III cry, “A horse, a horse, my kingdom for a horse!” At the Battle of Bosworth. Grayscale v SEC may be the horse that changes the history of cryptocurrencies. Or maybe it’s just another horse. Cryptocurrency enthusiasts use terms like “watershed,” “tipping point,” and “Rubicon” to refer to the Grayscale v SEC ruling. This is not unjustified as it could lead to the SEC capitulating and opening a virtuous upward spiral in cryptocurrency prices and legal acceptability.
But it’s also far from certain because the direct practical impact of this decision is minimal. The SEC’s ruling in favor of Grayscale Investments LLC has reignited hope that an exchange-traded bitcoin fund will soon be available. Bitcoin prices jumped. Cryptocurrency enthusiasts use terms like “watershed,” “tipping point,” and “Rubicon” to refer to the Grayscale v SEC ruling. This is not unjustified as it could lead to the SEC capitulating and opening a virtuous upward spiral in cryptocurrency prices and legal acceptability. But it is also far from certain because the direct practical impact of this decision is very small.
