The SEC’s Grayscale Court Decision Puts the Agency in the Role of “Will-They, Won’t-They,” Starring Gensler

The crypto industry’s campaign to create Exchange Traded Funds (ETFs) has now pushed the U.S. Securities and Exchange Commission to‌ the wall with Grayscale Investments. It’s a ⁤consistent⁢ court victory, but it’s still up to the‍ agency to decide whether to retreat or continue fighting.

“It’s back in court for the SEC,” said Dan‍ Berkovitz, who was the ‍agency’s general counsel until‌ earlier this year. If SEC officials wanted to ⁢deny Grayscale’s ⁤Bitcoin ETF again, “they really need to think about‌ other reasons​ that they haven’t come up with yet.” That would be a hurdle for ‌them.”

The U.S. ‍Securities and Exchange‍ Commission, chaired by Gary ‍Gensler⁤ now has​ several options: to appeal the decision; approve Grayscale’s application to list its bitcoin spot ETF; ⁢let it be automatically ⁤approved ⁢by doing nothing; or make a new, ⁤second attempt to reject the application due to new‍ objections. Much of the industry celebrated on Tuesday, believing that this was the beginning of ⁢the end of this ⁢particular SEC hurdle for crypto, and Bitcoin’s 6.5% price surge‌ was ⁢a ‌testament ⁢to that optimism. But Gensler is notoriously skeptical about cryptocurrencies and the dangers ‍he believes they pose⁣ to investors.

“Arbitrary and capricious’ aren’t words Gary Gensler wants to hear from federal⁤ courts, but that’s what this‍ unanimous panel of judges called his agency’s ruling,” said ⁢Pat Daugherty, a former SEC attorney who now represents crypto clients with Foley & Lardner. “The SEC⁤ couldn’t explain why‍ it could approve ETFs ‍based on bitcoin futures but​ not an ETF based on bitcoin. Since equal cases⁣ must ⁢be treated equally in America, the SEC lost.”

At stake ​is an investment product that could attract new investors to crypto, but which ​the ⁤SEC believes is still too dangerous.

So far, following the ruling, the securities regulator has said it is “reviewing” the court case and​ will‌ decide on ‌its next steps. With the original denial of Grayscale’s filing now overturned by‍ the court, it’s unclear when the clock will start counting down to an SEC deadline ‌again, but observers expect the agency will clarify that timeline soon.

“After losing⁢ this case, it will be a wise move for the⁤ SEC to quickly approve Grayscale’s filing,” said Daugherty, who also teaches⁣ crypto and ETF innovation ‍courses at Cornell Law School. “Will Chairman Gensler step down and change course? Maybe some Democrats​ on Capitol Hill will convince ⁢him.”

A former Republican ⁣SEC commissioner told AskFX — on condition that his name‍ not be used — that he wouldn’t be surprised if the agency participated in a further rejection would work.

“One theory is⁤ that the SEC will simply choose another reason to reject Grayscale’s proposal and force longer, more costly litigation,” Jake Chervinsky, chief policy​ officer of the Blockchain Association –⁢ a crypto lobbying group — said in⁤ a row from tweeting about the decision. “But another theory is that the SEC will take⁢ the DC Circuit’s decision as a (semi) graceful exit from its anti-ETF‌ position. I am in‌ this camp. It’s the right move.”

Grayscale ‍is‌ a unit ⁣of Digital Currency Group.

Like‌ most federal agencies, the ​SEC has had a long history of court defeats, including a major defeat of its 2010 “proxy‍ access” rule and some of ‍the special disclosure rules of the⁢ Dodd-Frank ⁢Act. After defeating a rule that says companies that extract commodities, such as ⁢The country struggled on for a​ decade, but the effort was actually required by law. This time the court’s rejection is different and addresses a ​position‌ that has arisen within the agency that the SEC should reject a ⁤particular financial project that would automatically be ⁤approved if the agency‍ instead did nothing.

Litigation isn’t getting any easier for the agency, Berkovitz ⁣said.

“The deference that the⁤ agency might have received in previous years is no longer accorded nearly as easily,” he said. And the ‌more the SEC loses, the harder it gets,⁢ he added.

Two of the judges ‌in the decision – Chief Justice Sri Srinivasan and Chief Justice Harry Edwards – were appointed by the Democrats and belonged to the same party as Gensler, so their ​view ​cannot be characterized as a conservative backlash against the government.

“I’ve never seen a financial regulator’s rejection of an⁤ application be⁣ dismissed by a bipartisan judiciary made up of moderates, ⁣conservatives and progressives, as just happened at Grayscale,” said Justin‌ Slaughter, ​who​ has worked at the SEC and is now Policy Director at Paradigm. “The SEC has restored bipartisanship‌ in DC.”

Whether Grayscale ends ‍up winning or not, the ruling may give a boost to other ETF efforts.

“While ⁤there is no guarantee that the SEC will approve Grayscale’s Bitcoin ETF, it is likely that they will approve any ETF filing ⁤with what they believe to ⁢be sufficient information-sharing arrangements, particularly those from Blackrock and Fidelity will,” predicted CoinRoutes co-founder and CEO Dave Weisberger, who called the ​ruling⁣ a “major victory” for crypto.

One⁢ of the SEC’s main complaints regarding these ETF efforts was the inadequate oversight of trading information, as it denied them one by ‍one. Weisberger suggested that the SEC could now decide to approve the projects with good surveillance plans, calling ⁤it a victory for consumer protection.

Coinbase (COIN), the crypto exchange that would ​handle much of the needed oversight, noted Tuesday that “the courts are giving ‍us regulatory clarity where the SEC has refused,” according to a ‍statement by Paul Grewal , the publicly traded stock exchange Chief Legal ‍Officer of the company. “While we⁢ still believe comprehensive state crypto legislation is the best way forward, decisions ⁢like these are an important step ⁤toward the clarity the industry needs.”

However, Gensler’s ‍SEC still ‌has supporters who support the​ Encourage agency to‍ resist.

“The decision does not change the fact⁢ that the Bitcoin market is subject to fraud and manipulation or that an ETF would pose a⁣ serious threat to investors, which is why the SEC has and should have ​rejected Grayscale,” said Dennis‍ Kelleher, CEO of‌ Better Markets, a Washington-based ⁣group that often tries to counter financial industry lobbying. “The SEC should‌ consider revoking previous‍ unwarranted approvals for bitcoin futures⁢ ETFs.”