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Grayscale: "The SEC has lost its main argument against a Bitcoin ETF".

Tuesday, August 29, 2023

Grayscale's legal victory over the SEC undermines the US regulator's anti-Bitcoin ETF stance. Morgane Fournel-Reicher (Kramer Levin), a lawyer specialising in US financial law, discusses the decision in an interview.

What is the court's decision?

This ruling follows the SEC's rejection in 2022 of the Bitcoin ETF application filed by Grayscale. In response, Grayscale had taken the case to court to have it recognised that this decision did not comply with the administrative rules governing the operation of the US financial regulator.

The SEC's arguments were that Grayscale's spot ETF did not have sufficient safeguards to prevent manipulation of the bitcoin price, even though it had approved futures ETFs with the same feature. The judges therefore disapproved this "arbitrary" decision, as can be read in the court documents.

What motivated the SEC's position?

In the context of futures ETFs, the SEC had taken the view that the price of bitcoin was less likely to be manipulated because it was linked to the Chicago Mercantile Exchange (CME), an exchange under the regulator's supervision. However, the bitcoin price used by the CME is an average of the bitcoin price on four "spot" crypto Exchanges (Bitstamp, Coinbase, Kraken and itBit, editor's note).

What the court is saying is that the SEC has not demonstrated that the "futures" and "spot" markets operate differently and that one of them deserves separate treatment.

What happens now?

The SEC is not compelled to approve Grayscale's ETF. The court is simply saying that the main argument for refusing this application is not justified. Now there are two possible scenarios: the first is for the SEC to find another argument, or to comply with the law and approve Grayscale's proposal.

What new anti-ETF arguments could the SEC raise?

I'm thinking of the issue of structuring the fund's activities, but price formation had to be their strongest argument. What you have to understand is that the SEC has just lost its main argument against a "spot" Bitcoin ETF! They wouldn't have gone to litigation without firmly believing it, and they've been arguing it for years... If they have other arguments, these will be even more likely to be rejected by a judge.

How does the SEC usually behave in this type of situation?

It's not impossible that the regulator will look for another argument to reject Grayscale's ETF, but that would risk weakening its position and show that there is discriminatory treatment between players.

We know that BlackRock's ETF will be accepted because this giant has an acceptance rate for its ETFs of almost 99%. If BlackRock has embarked on this project, it is probably because they have received some sort of tacit acceptance from the SEC. BlackRock's ETF will see the light of day, that's a virtual certainty.

What impact will this decision have on all "spot" Bitcoin ETF filings in the US?

Even if in the end Grayscale is not allowed to turn its Trust into an ETF, because it's a special structure, the ruling could be reused by other crypto players. In fact, we should see this in the next few days, as several applications are awaiting validation by the SEC.

After the Ripple trial, is the tide turning in favour of cryptos in the US?

It's still a little early to say. In the case of Ripple, the decision is aimed solely at this specific instance. And despite this, the SEC continues to be extremely aggressive on most crypto cases.

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Cette analyse n'est pas un conseil en investissement. Elle a été rédigée sans prendre en compte votre situation personnelle et notamment votre situation financière, votre profil de risque et vos objectifs d’investissement.

Avant d’investir dans un produit, l’investisseur doit comprendre entièrement les risques et consulter ses propres conseillers juridiques, fiscaux, financiers et comptables.

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