A spot bitcoin ETF is much closer to reality, but investors aren't quite there yet


Al Drago The U.S. Court of Appeals in Washington, D.C. Circuit has sided with Grayscale against the SEC in a lawsuit, increasing the likelihood that an exchange traded fund for bitcoin will be approved. Grayscale had previously been denied by the SEC’s request to convert Grayscale Bitcoin Trust into an ETF. The SEC’s problem is that the court rejected the basis upon which it has denied a spot Bitcoin ETF over the past few years. The SEC said that it cannot approve a bitcoin spot ETF due to the lack of a sufficiently regulated crypto market. But the court criticized the SEC for its approval of a bitcoin futures product. In essence, the court said:

Hey you approved a bitcoin futures product. Futures and spot markets are “like” product. The court stated that because the spot and the futures markets of bitcoin are closely related, manipulation on either market would affect the price for bitcoin futures. The appeals court stated that the denial of Grayscale’s proposal was arbitrary because the Commission did not explain why it treated similar products differently. The tragedy of this decision is that it doesn’t do anything to ease the concerns about possible manipulation. These concerns have not disappeared. The court said that SEC erred by approving bitcoin futures but not another ETF (spot Bitcoin). What’s next from here? Much depends on Gary Gensler, the SEC chair. He can either fold or fight until the end. The SEC is faced with several options.

The SEC has several options. This decision must be made by the regulator within 45 days. The SEC can appeal, but it will be more difficult due to the harshness of the ruling.

After the SEC decides to appeal, it has several options.

1). Approve as many or as few of the nine applications as quickly as possible for a bitcoin spot ETF. The SEC can follow the court’s ruling and approve the Grayscale ETF or other funds.

Applicants for a spot bitcoin ETF

Grayscale Bitcoin Trust

Ark/21 Shares Bitcoin TrustBitwise Bitcoin ETF TrustBlackRock Bitcoin ETF Trust

VanEck Bitcoin Trust

WisdomTree Bitcoin Trust

Valkyrie Bitcoin Fund

Invesco Galaxy Bitcoin ETFFidelity Wise Origin Bitcoin Trust

2) Delay as long as the law allows. Ark was the first applicant to submit a request, and it appeared in the Federal Register of May 15, 2018. The SEC can approve or reject these applications within 240 days, which means the first deadline will be January 10, 2020.

3). Come up with another reason why the application shouldn’t be approved, and dare Grayscale again to sue. The SEC cannot use the argument there is no market large enough to prevent manipulation. However, it can come up with another argument.

Like what? It’s not very clear. There’s still one last possibility: The SEC could simply kill the Bitcoin futures ETF. It is theoretically feasible, but not likely, given that the SEC has recently approved (leveraged), bitcoin futures. Who’s in the first line?

It’s possible that the SEC will first approve ARK, or even all of them. I wonder if SEC regrets its decision to approve Bitcoin futures.

Matt Hougan, Chief Investment Officer of Bitwise Asset Management and one of the applicants to a spot Bitcoin ETF will be appearing on ETF Edge at Halftime Report on Wednesday. Hougan, Grayscale’s Chief Legal Officer, and Jeremy I. Senderowicz will join him on ETF Edge, at 2:00 PM ET. They have been representing ETFs in the past 20 years.