Grayscale Investments emerged the victor in a court case against the Securities and Exchange Commission that has drawn the attention of many, including some deep-pocketed investors eager to see a spot bitcoin ETF in the U.S.
"Many institutions have been watching the Grayscale decision closely," said Diogo Mónica, co-founder and president of Anchorage Digital, which operates what it says is the first and only federally chartered digital asset bank in the U.S.
In an opinion released Aug. 29, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit sided with Grayscale in its case against the SEC. The lawsuit centered on the regulator's denial of an application to convert the Grayscale Bitcoin Trust to a spot bitcoin ETF, with Grayscale calling the denial "arbitrary and capricious."
The SEC failed to adequately explain why it had approved the listing of bitcoin futures exchange-traded products but not Grayscale's proposed product, the judge's opinion said. The court granted Grayscale's petition for review and vacated the SEC's order, it said. Two days later, the SEC deferred on filings from several firms on their proposed spot bitcoin ETFs.
While the news was "certainly exciting," the court "did not say that Grayscale is entitled to an ETF," said Tom Staudt, chief operating officer at ARK Investment Management, one of a number of firms currently in the race to offer a spot bitcoin ETF.
Still, the Grayscale decision is "a big breakthrough for bitcoin," Mr. Staudt said Aug. 29, adding that he believes a spot bitcoin ETF would find an appetite among institutional investors such as pension funds.
"Absolutely. I do," he said, adding that for such investors, "their alternatives in the market at an institutional-grade level have been very few and they've been very expensive."
A spot bitcoin ETF would constitute an attractive option for institutions seeking to benefit from bitcoin exposure "without the risks of holding the asset directly," said Mr. Mónica in written comments.
"An SEC-regulated Bitcoin ETF would unlock the next generation of crypto adoption, allowing trillions in institutional capital to come off the sidelines," he said.
And, if the SEC were to approve multiple spot bitcoin ETFs simultaneously, competition for the lowest management fee would likely push down costs, Mr. Mónica added.
Steven McClurg, chief investment officer and co-founder at Valkyrie, which has filed to offer a spot bitcoin ETF called the Valkyrie Bitcoin Fund, said in an interview following the release of the court's opinion that Valkyrie had been following the case closely.
"And based on all the arguments that we saw, we didn't think that there really was a choice other than the ruling that came out," he said.
Judging from the volume of phone calls Valkyrie received Aug. 29, others appeared to be following the case as well.
"Today, the number of calls we've gotten are probably more than we've gotten in the last year from institutional clients," Mr. McClurg said Aug. 29. "This is a vehicle that makes it easy for pensions to invest in."
Most pension funds aren't going to "open up a Gemini account and go buy bitcoin themselves," he said.
Grayscale's win was widely expected, said Jeremy I. Senderowicz, a shareholder at law firm Vedder Price, adding that oral argument went "extremely well for Grayscale and extremely badly for the SEC."
Unless the SEC can get the decision overturned on appeal or it can come up with another viable reason for rejecting spot bitcoin ETFs, which he believes is much less likely, "then the SEC is essentially going to be forced to approve spot bitcoin ETFs," the attorney said.
"The exact timing though is uncertain," he said, adding, however, that "I would think the most likely outcome is that this would result in spot bitcoin ETFs being offered sooner rather than later."
The Grayscale ruling put the onus back on the SEC to apply current rules and figure out the next step. The regulator on Aug. 31 already deferred on spot bitcoin ETF filings from Bitwise, VanEck, Invesco, Valkyrie and WisdomTree, according to documents posted on its website. A BlackRock spokesperson said the firm was also deferred, Bloomberg reported.
"The court didn't say 'we approve this.' It said 'hey, SEC you must take another look at this and follow the rules," said Alex Morris, chief investment officer of F/m Investments, which manages $5 billion in assets and is closely watching the approval process.
Bitcoin is the most well-known cryptocurrency and "was singled out because it's so popular. That's the regulators' job."
His prediction is that the larger players such as Fidelity Investments and BlackRock may come to market first, but not before many more months of SEC scrutiny.
"There will be more rounds of this to come," he said.
