by Zain Jaffer
A three judge panel of the DC Federal Court of Appeals ruled in late August 2023 that the US Securities and Exchange Commission (SEC) did not have a legal basis to reject Grayscale’s proposed spot Bitcoin ETF. Grayscale runs the $16B Grayscale Bitcoin Trust (GBTC) which they hope to convert it into a spot Bitcoin ETF. Other entities that are also seeking approval for a spot Bitcoin ETF from the SEC include Blackrock, Ark Invest, Van Eck, Fidelity, Wisdom Tree, Valkyrie, and others.
“The Securities and Exchange Commission recently approved the trading of two bitcoin futures funds on national exchanges but denied approval of Grayscale’s bitcoin fund. Petitioning for review of the Commission’s denial order, Grayscale maintains its proposed bitcoin exchange-traded product is materially similar to the bitcoin futures exchange-traded products and should have been approved to trade on NYSE Arca. We agree,” DC Circuit Judge Neomi Rao said.
“The denial of Grayscale’s proposal was arbitrary and capricious because the (SEC) Commission failed to explain its different treatment of similar products,” the ruling said. “We therefore grant Grayscale’s petition and vacate the order.” The SEC had previously approved Bitcoin futures ETFs. The Court believes that ruling in favor of futures but rejecting spot ETFs was arbitrary and capricious.
A spot Bitcoin ETF is the Holy Grail for most supporters. At present, Bitcoin trades in crypto centralized and decentralized exchanges as a commodity, but is still viewed by many mainstream investors as a risky and volatile proposition. Once the SEC approves any spot Bitcoin ETF, it will give investors the legal protections that are already given to other ETFs such as those for gold and other investment instruments. A spot Bitcoin ETF’s would be shares registered with the SEC under the Securities Act of 1933. Unlike the commodity Bitcoin, the spot ETF will be subject to monitoring and the legal framework of the SEC, thus offering investors better peace of mind.
When a spot ETF was created for gold in the early 2000s, it helped gold appreciate towards its current price. When sellers offer a spot ETF, they are required to buy and hold the commodity, whether gold or Bitcoin. The commodity is safekept by their approved custody partner, and all trades are carefully monitored by the surveillance partner.
This favorable federal court decision for Grayscale does not mean that the SEC will automatically approve a spot Bitcoin ETF. It will however make the rejection argument used in the Grayscale case unusable for other ETF applications.
After the FTX crash which also happened during SEC Chairman Gary Gensler’s term, the SEC required spot ETF applicants to separate the ETF seller, custodian, and surveillance functions. Many of the spot ETF applicants mentioned above have selected custodians such as Coinbase and surveillance partners like the NASDAQ and the CME. The SEC believes that having three independent entities will prevent the kind of connivance that happened with FTX.
If and when the US SEC finally approves a spot Bitcoin ETF, it may open the floodgates for a host of institutional investors who now believe in Bitcoin as a hedge against monetary debasement. Right now, corporate and pension fund boards will not allow their managers to purchase Bitcoin directly. But they may do so with spot ETFs that have the legal protections offered by the law.
Unlike the US Treasury, which can print US dollars as much as it wants, the fixed 21 million supply of Bitcoins can not be increased, even by its pseudonymous founder Satoshi Nakamoto.
The day when we see Bitcoin in corporate treasuries, family office, hedge funds, bank assets, pension fund portfolios, and the like may not be too far off once a spot ETF is approved.