News that a Washington DC Court of Appeals ruled in favor of Grayscale Investments LLC over the Securities and Exchange Commission has ignited hope that a Bitcoin exchange-traded fund will soon be available. Bitcoin prices jumped.
Crypto fans are using terms like “watershed,” “turning point” and “Rubicon” for the Grayscale v. SEC ruling. That’s not unjustified since it could lead to the SEC throwing in the towel and unlocking a virtuous spiral upward in crypto prices and legal acceptability. But it’s also very far from certain as the direct practical effect of this decision is infinitesimal.
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 of Bitcoin futures. It took over five years for the SEC to approve the first Bitcoin futures ETF — it was difficult for the agency to allow futures ETFs for stocks, bonds and commodities, but not crypto assets. Grayscale then argued its proposal for a spot Bitcoin ETF was so similar to the already-approved Bitcoin futures ETFs that the SEC was arbitrary and capricious to deny its application. The court agreed.
This by no means clears the way for a spot Bitcoin ETF. The SEC could appeal the decision. It could also accept the decision but deny the Grayscale application for other reasons. Importantly, the battlefront has shifted and from here on the SEC is in a defensive position. I expect the SEC to concentrate on setting the terms of the peace treaty to end the fight rather than trying to hold the line against exchange-traded crypto funds. (Disclosure: I am an active crypto investor, and have venture capital investments and advisory relations with crypto companies.)
My guess is that the SEC is more comfortable with spot Bitcoin ETFs run by the largest asset managers, such as BlackRock Inc. and Fidelity Investments, than digital asset specialists like Grayscale. The most likely scenario seems to be that the SEC will fast-track applications from large traditional asset managers rather than concentrating on Grayscale’s application.
Why does this matter? It’s easy for retail investors to buy Bitcoin directly or via exchange-traded closed-end funds like Grayscale. With only a little more trouble they can speculate on Bitcoin prices indirectly using futures or options or funds based on those derivatives. Nevertheless, it’s likely that many new retail investors will be drawn in by the comfort and familiarity of buying ETFs through traditional large brokerage firms.
Futures exist in zero net supply, for each buyer there is a seller. But spot Bitcoin ETFs will hold Bitcoin in positive supply, removing Bitcoin from the market for other uses. If demand for those other uses stays the same, the price of Bitcoin should rise, since the total amount of Bitcoin is fixed irrevocably by algorithm. Moreover, Bitcoin has no value anchor — no use value to moderate its price swings — so even small changes in the supply-demand balance can cause large price changes.
There is a further reason for increase. If ETF holdings are large and reasonably stable — at least compared to volatile cryptocurrency flows — it could give Bitcoin more trust and backing, the same way central bank reserves give investors confidence in traditional currencies. Widespread retail holdings via ETFs also create a broader political base for pro-crypto regulation.
Crypto fans tend to be optimists, and many are already mentally traveling down this road to anticipate major price increases for Bitcoin in the near future. Traditional investment analysts are more skeptical. They realize that there are many uncertain steps between this one court ruling and a lasting peace between crypto and traditional financial regulation. Moreover, crypto has always been willing to supply scandals and disasters to choke off progress toward acceptance.
Another important consideration is that while the SEC has been taking point and generating most of the news around crypto regulation, Congress — which outranks the SEC — has been working steadily on the issue. It’s also less constrained by federal courts. Most crypto enthusiasts expect help from Congress if partisan passions cool after the 2024 elections. But politics is as volatile as crypto prices, and things could change. International regulation and practice matter quite a bit as well.
Shakespeare had Richard III crying, “A horse, a horse, my kingdom for a horse!” at the Battle of Bosworth. Perhaps Grayscale v SEC will be the horse that changes crypto history. Or maybe it’s just another horse.
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