Well, now the SEC is in a real pickle. 

The U.S. Court of Appeals for the D.C. Circuit sided with Grayscale in a lawsuit against the SEC, greatly improving the chances that a bitcoin exchange traded fund will be approved. The SEC had earlier denied Grayscale’s application to convert its Grayscale Bitcoin Trust to an ETF. 

The problem for the SEC is that the court has squarely rejected the very basis on which the SEC has been denying a spot bitcoin ETF for the past several years. 

The SEC has said it can’t approve a spot bitcoin ETF because there isn’t a regulated crypto market of sufficient size to prevent manipulation. 

But the court called out the SEC over its prior approval of a futures-based bitcoin product.  The court said, in essence, Hey, you approved a futures-based bitcoin product. The futures and the spot market are “like” products. If you approve one, you have to approve the other. 

“Because the spot and futures markets for bitcoin are highly related, it stands to reason that manipulation in either market will affect the price of bitcoin futures,” the court said. 

“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” the appeals court said. 

The tragedy of this ruling is that it does nothing to alleviate the concern over possible manipulation, which has not gone away. The court simply said that the SEC has erred in approving one ETF (bitcoin futures) and not approving another (spot bitcoin). 

Where to from here 

What’s next?  A lot depends on whether SEC Chair Gary Gensler wants to fold or fight to the end. 

The SEC has several choices to make. 

The first is whether it wants to appeal the case, in which case the order would be stayed until there is a decision on the appeal. The regulator has 45 days to make that decision. An appeal is possible, but the harsh tone of the judicial ruling certainly makes it more difficult for the SEC to appeal. 

Depending on the decision to appeal, there are several choices after that. 

1) Approve all or some of the nine applications for a spot bitcoin ETF as soon as possible. The SEC could go along with the court ruling and issue an order allowing the exchange on which the Grayscale ETF would list (NYSE Arca) to go ahead and list the Grayscale fund, or approve other funds that have applied. 

Applicants for a spot bitcoin ETF

• Grayscale Bitcoin Trust
• Ark/21 Shares Bitcoin Trust
• Bitwise Bitcoin ETF Trust
• BlackRock Bitcoin ETF Trust
• VanEck Bitcoin Trust
• WisdomTree Bitcoin Trust
• Valkyrie Bitcoin Fund
• Invesco Galaxy Bitcoin ETF
• Fidelity Wise Origin Bitcoin Trust

 2) Delay as long as the law allows.  The first of the applicants to file was Ark, which published in the Federal Register on May 15.  The SEC has a maximum time of 240 days to approve or deny those applications, meaning the first deadline would be January 10, 2024. 

3) Come up with a new rationale why the application should not be approved and dare Grayscale to sue again. The SEC can no longer use the argument that there is not a market of sufficient size to prevent manipulation, but it could come up with other arguments. 

Like what?  That’s not clear. 

There’s one final possibility: the SEC could just kill the bitcoin futures ETF.  That is theoretically possible, but unlikely, considering the SEC recently approved (leveraged) bitcoin futures. 

Who’s first in line? 

Even assuming a spot bitcoin ETF is coming, it doesn’t mean Grayscale can necessarily jump the line. It’s possible the SEC will approve ARK first, or all of them at the same time. 

I wonder if the SEC is regretting that decision to approve bitcoin futures. 

Note:  Matt Hougan Chief Investment, Officer for Bitwise Asset Management, one of the applicants for a spot bitcoin ETF, will appear on ETF Edge on Halftime Report Wednesday.  For ETF Edge at 2:00 PM ET, Hougan will be joined by Craig Salm, Grayscale’s chief legal officer, and Jeremy I. Senderowicz, an attorney with VedderPrice who has been representing ETFs for close to 20 years.