Despite a multi-year market slowdown, there are signs working in favor of the Web3 industry. Long-held claims about regulatory uncertainty have been validated and a major political win came in the form of a scathing rebuke of how the U.S. Security and Exchange Commission (SEC) is approaching crypto.
Historically it is rare for a federal judge to use such bombastic language as calling an administrative agency's reasoning "arbitrary and capricious" when rejecting Grayscale's proposal to convert a bitcoin trust into an exchange-traded fund (ETF). With an equal amount of gusto a panel of judges for the U.S. District of Columbia Court of Appeals said “[t]he Commission’s unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decision making.” [Emphasis added.]
David Ackerman is the chief compliance officer and data protection officer for Mobilecoin.
Despite the strong wording of the decision, what happens now is for the original application to go back to the SEC for review all over again. The SEC has already immediately delayed deciding on all open or refiled spot market bitcoin ETF applications until at least October. In doing so, the SEC has options.
What happens next is where opportunities for the entire crypto industry lie. Opportunities for the Web3 community, for the SEC and for the United States to potentially pivot toward a more collaborative, innovation-friendly future.
Should the SEC wish to challenge the federal judge's conclusions in the Grayscale decision, the company's application could simply be denied again for a different (or even an analogous) reason. That course of action becomes problematic quickly. The last thing any lawyer wants to do is upset a federal judge. That is a terrible idea, if the aim to quash the U.S. spot bitcoin ETF market before it begins.
If the SEC denies the Grayscale application a second time, then another federal judge will review it to determine:
- If the denial is essentially similar;
- Did the commission address the previous concerns raised, and
- How does the denial either protect investors or otherwise support the SEC mandate
Based on the answers to the aforementioned questions, if a judge perceives SEC actions as more of an attack on an industry and less about protecting investors or market integrity, judges can flex their muscle.
It is difficult for a member of the judiciary to force an administrative action, but they can add language to their decisions that opens the door to future litigation. This could include another reversal but with added commentary suggesting if plaintiffs decide to sue civilly, they would probably be entitled to damages.
Judges could also suggest that individuals may be personally liable. This is not as far-fetched a possibility as it may initially sound. In recent memory, current members of the judiciary have shown a willingness to rebuke administrative agencies. There are already concerns about a brain drain of experienced professionals in government, it is difficult to imagine how that may get exasperated in the event personal liability for administrative decisions becomes even a fleeting possibility.
SEC Chair Gary Gensler is far smarter than that. Furthermore, the SEC staff is a large group of dedicated public servants who are brilliant, mission-driven and motivated to ensure U.S. markets are some of the most stable in the world.
An SEC win is very much a possibility, too. However, the political capital needed to further prevent innovation in this space without clear and convincing evidence that those actions support investor protection is simply not worth it.
The United States has a storied history of balancing innovation with investor protection. We have proven both are concurrently attainable time and time again across every sector. It is time to show we can do it again and embrace the innovations Web3 already brings while focusing on mitigating the risks to investors.
Let us stop viewing the battles fought in the courts as wins and losses and use each judicial decision as a way to extend an olive branch. The author and bailiwick of American pragmatism Ralph Waldo Emerson famously wrote, “America is another name for opportunity.” Let us remind the world why that is.