Pending Grayscale ruling could tip balance in race for bitcoin ETF

The Securities and Exchange Commission’s Friday move to further delay a decision on an application for a spot bitcoin ETF from Ark Invest and 21Shares may not have come as a total surprise, but experts say a looming court ruling and questions posed by the agency could make all the difference.

A final ruling in a lawsuit brought by Grayscale Investments against the SEC last year for rejecting its proposal to convert its flagship fund, GBTC, into a spot bitcoin ETF could play a role, said Nathan Geraci, president of The ETF Store, an advisory firm. Grayscale presented oral arguments in March, accusing the SEC of contradicting itself by allowing bitcoin futures ETFs and not similar spot bitcoin products. 

The SEC will wait until there is a final ruling in the Grayscale lawsuit, which could come any day now, Geraci said, adding it could come in the SEC's favor.

"In that scenario, the SEC would have much more cover to continue denying spot bitcoin ETFs," Geraci said. "Why approve a spot bitcoin ETF until they know the outcome of that case?  There’s simply no reason to do so in my opinion." 

The SEC has not yet approved of a spot bitcoin ETF, though did allow bitcoin futures ETFs to trade in 2021.  

Surveillance sharing agreements 

Firms vying for a spot bitcoin ETF since the beginning of the summer have named Coinbase as a surveillance sharing partner in an effort to differentiate their applications from ones that have failed in the past and help assuage regulator fears about market manipulation. 

“Once that [a final ruling] happens — and assuming Grayscale is successful — then the linchpin for spot bitcoin ETF approval will be how the SEC views the Coinbase surveillance sharing agreements proposed by ETF listing exchanges,” Geraci said. 

Geraci said he believes that a favorable Grayscale ruling and the Coinbase surveillance sharing agreements “will be enough to get the SEC over the finish line on spot bitcoin ETF approval.” 

“However, the SEC is not required to make a final decision until January, 2024 and I expect them to take their sweet time,” Geraci added. 

Reading the tea leaves

In the SEC’s filing to delay a decision and ask for public commentary, it posed questions about whether commenters believe the exchange has shown that “the bitcoin market is resistant to price manipulation.” 

The agency also added in phrasing to that question, quoting the exchange in part saying  “bitcoin is resistant to price manipulation and that other means to prevent fraudulent and manipulative acts and practices ‘exist to justify dispensing with the requisite surveillance sharing agreement’ with a regulated market of significant size related to spot bitcoin.’”

Vivian Fang, a finance professor at Indiana University, said the phrasing in that question signals that the SEC could be “warming up to the idea of approving a spot bitcoin ETF.”

“I would say that these are the greatest strides made so far, and I look forward to seeing the first spot bitcoin ETF approved this year,” Fang said.