It appears highly likely that a debut for a Bitcoin exchange-traded fund (ETF) is on the horizon, as a federal court has overturned the Securities and Exchange Commission’s (SEC) rationale for rejecting a Bitcoin ETF. This decision holds significant implications not only for the cryptocurrency sector but also for established companies like BlackRock and Invesco, eager to enter the digital asset space.
Nonetheless, while the potential approval of a Bitcoin ETF is undoubtedly positive for the cryptocurrency industry, there are reasons to temper expectations regarding the far-reaching impact of this decision. The SEC still retains the option to contest or postpone the launch of a Bitcoin ETF if it chooses to do so.
In the ruling by the U.S. Court of Appeals for the D.C. Circuit, a unanimous panel of judges determined that the SEC’s denial of Grayscale Investments’ attempt to convert the Grayscale Bitcoin Trust into an ETF was arbitrary and capricious. The SEC’s argument about the inadequacy of fraud and manipulation controls in the Bitcoin market was deemed insufficiently explained by the judges, particularly given the agency’s approval of ETFs linked to Bitcoin futures.
Now that the decision has been issued, the SEC has 45 days to request a review by a larger panel of appellate judges. Alternatively, it could escalate the case to the Supreme Court, although such a move would likely necessitate approval from the Justice Department.
Even if the SEC chooses not to contest the D.C. Circuit’s decision, it has other avenues to potentially delay the ETF launch. For instance, the agency could reject Grayscale’s ETF conversion based on unaddressed concerns, leading to further legal action. In a more extreme scenario, the SEC might even reverse its approval of Bitcoin futures funds.
According to Nate Geraci, president of the ETF Store advisory firm, the SEC and Chairman Gary Gensler are now faced with a challenging situation, potentially requiring them to approve these ETFs. This decision could set records for ETF launches and render Bitcoin futures ETFs obsolete.
While the approval of a Bitcoin ETF could boost token prices and offer a marginal revenue increase for firms like BlackRock and Fidelity, the overall impact might be limited. For example, even if a single Bitcoin fund captured 5% of the market at a 0.5% annual fee, it would generate only around $136 million in annual revenue.
The most significant potential benefit lies in launching token investments into the mainstream. A Bitcoin ETF could create a familiar vehicle for financial advisors and institutional investors to own the token, potentially driving $30 billion in new demand for Bitcoin, as estimated by crypto trading firm NYDIG.
However, even with these prospects, the case of the ProShares Bitcoin Strategy ETF demonstrates that success might not be guaranteed. Despite a strong start, this Bitcoin futures ETF has amassed only about $940 million in assets.
The ruling holds different implications for Coinbase Global, which is dealing with a separate lawsuit from the SEC alleging the operation of an unregistered securities exchange. Despite this, the GBTC decision bolsters Coinbase’s position, suggesting a need for the SEC to reevaluate its approach to digital asset enforcement and application reviews.
Though the Coinbase case may take years to conclude, the momentum appears to have shifted in favour of the cryptocurrency industry for the time being.