(CyprusMail) – In a landmark judgement on Tuesday, the US District of Columbia Court of Appeals found that the Securities and Exchange Commission (SEC) erred when it denied cryptocurrency asset management Grayscale Investments’ request to establish an exchange-traded fund that monitors the price of bitcoin.
The cryptocurrency and asset management sectors, which have been attempting for years to persuade the SEC to approve a spot bitcoin ETF, have been closely following the case. The largest cryptocurrency in the world, bitcoin, would allegedly be accessible to investors without requiring them to actually hold it. However, the SEC is concerned that spot bitcoin ETFs could be manipulated.
What you need to know is as follows:
WHAT HAPPENED TO GRAYSCALE?
The SEC turned down Grayscale’s request to turn its spot Grayscale Bitcoin Trust (GBTC.PK), which is traded on the Arca market of the New York Stock Exchange, into an ETF last year.
However, the regulator has allowed bitcoin futures ETFs, which monitor contracts to purchase or sell bitcoin at a predetermined price. The agency has rejected spot bitcoin ETFs. The SEC rejected Grayscale and Arca’s proposal, saying it did not meet its standard for applying the same market manipulation safeguards as were allowed for other futures ETFs.
Grayscale was only one of many asset managers whose spot bitcoin ETF applications the SEC rejected on the basis of investor protection, including Cathie Wood’s ARK, Fidelity, and Invesco (IVZ.N). Grayscale sued the SEC in contrast to the other companies. The case was immediately sent to the appeals court because the defendant is a regulator.
WHAT IS GRAYSCALE’S POINT OF VIEW?
Grayscale contended that because both products depend on the price of bitcoin as their underlying asset, the surveillance arrangements for the bitcoin futures ETF should also be suitable for Grayscale’s spot ETF.
The main exchange for these assets is the Chicago Mercantile Exchange (CME), and bitcoin futures ETFs follow the prices of those contracts. According to the SEC, the CME “monitors futures market circumstances and price movements continuously in order to identify and prevent price distortions, including price distortions resulting from manipulative efforts.”
A spot bitcoin ETF, according to Grayscale’s lead attorney Donald Verrilli Jr., would “better protect investors” since it would offer them access to CME market monitoring. He made this argument in court in March. Currently, most American bitcoin investors use less reputable or unregulated exchanges.
The CME futures surveillance agreement, according to the SEC, might also identify potential manipulation in the spot markets, but Grayscale lacks evidence to support that claim.
WHAT VERIFIED THE COURT?
Grayscale demonstrated that their proposed bitcoin ETF is “materially similar” to the authorised bitcoin futures ETFs, according to the court’s panel of justices. The reasons for this include that the underlying assets, bitcoin and bitcoin futures, are “closely correlated,” and the surveillance-sharing arrangements with the CME are “identical and should have the same likelihood of detecting fraudulent or manipulative conduct in the market for bitcoin.”
In light of this, the court determined that the SEC’s decision to reject the filing was “arbitrary and capricious” since it “never explained why Grayscale owning bitcoins rather than bitcoin futures affects the CME’s ability to detect fraud.”
WHAT THE NEXT STEP IS?
The decision may be appealed by either party within 45 days, at which point the matter may either be heard by the US Supreme Court or an en banc panel. The SEC may or may not file an appeal. On Tuesday, requests for response from the regulator were not immediately fulfilled.
In the event Grayscale wins and the SEC decides not to file an appeal, the court will clarify how its ruling should be carried out. This would entail giving the SEC specific instructions to approve the application or to reconsider Grayscale’s application, in which case the SEC might still reject the idea for other reasons.
WHAT IMPACT WILL A GRAYSCALE WIN HAVE ON OTHER APPLICATIONS?
The world’s largest asset management, BlackRock (BLK.N), Fidelity, WisdomTree (WT.N), VanEck, Bitwise, and Invesco are among the companies that have filed spot bitcoin ETFs for listing on Nasdaq (NDAQ.O) or CBOE Global Markets this year.
To regulate trade in the underlying bitcoin market, many have suggested collaborating with Coinbase (COIN.O), the biggest crypto exchange with US roots. These applications have been publicly acknowledged by the SEC, and a decision may take up to 240 days.
It’s unclear what the decision from Tuesday means for such applications, and it does not necessarily follow that the SEC will have to approve a bitcoin ETF in light of the decision. However, the verdict might influence how the SEC views those plans.
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