The U.S. Securities and Exchange Commission (SEC) finds itself in a precarious position following a recent court ruling that challenges its long-standing reasons for denying spot Bitcoin ETFs, according to Elliott Z. Stein, a senior litigation analyst at Bloomberg Intelligence.
Historically, the SEC has cited the lack of a regulated crypto market of sufficient size to prevent manipulation as the primary reason for its denials. However, the U.S. Court of Appeals for the D.C. Circuit sided with Grayscale, a leading cryptocurrency asset management firm, stating that the SEC's denial was "arbitrary and capricious." The court emphasized that the SEC had previously approved a futures-based Bitcoin product, thereby setting a precedent that should extend to spot Bitcoin ETFs.
The court ruling comes at a time when the industry is increasingly optimistic about the approval of spot Bitcoin ETFs. Analysts like James Seyffart and Eric Balchunas suggest there's a 75% chance of approval this year and a 95% chance by the end of 2024.
Stein warns that the SEC's shift to new grounds for denial, such as custody issues, could expose them to further legal challenges.
The SEC now faces a series of choices. It could appeal the court's decision, although the strong language of the ruling makes that option less appealing. Alternatively, the SEC could approve some or all of the nine pending applications for a spot Bitcoin ETF, including those from major players like Ark, Bitwise, and BlackRock. The regulator has a maximum of 240 days to make this decision, with the first deadline set for January 10, 2024. Another option would be to come up with a new rationale for denial, a move that could invite additional lawsuits.
SEC Chair Gary Gensler must decide whether to adapt to the changing landscape or dig in his heels, potentially inviting more legal battles. The decision could have far-reaching implications for the cryptocurrency market and the broader financial ecosystem.