Grayscale's Legal Win Versus SEC Makes Spot Bitcoin ETF Approval More Likely: JPMorgan

For the SEC to defend its denial of Grayscale’s proposal to convert GBTC into an ETF, it would have to withdraw its previous approval of futures-based bitcoin ETFs, which is unlikely, the report said.

AccessTimeIconSep 4, 2023 at 9:08 a.m. UTC
Updated Sep 5, 2023 at 3:36 p.m. UTC

It is more likely that the Securities and Exchange Commission (SEC) would be forced to approve the spot bitcoin (BTC) exchange-traded-fund (ETF) applications from several asset managers after a federal court ruled that the regulator must review its rejection of Grayscale’s attempt to convert the Grayscale Bitcoin Trust (GBTC) into an ETF, JPMorgan (JPM) said in a report Friday.

“The most important element of the Grayscale vs. SEC court ruling was that the denial by SEC was arbitrary and capricious because the Commission failed to explain its different treatment of similar products i.e., futures-based bitcoin ETFs,” analysts led by Nikolaos Panigirtzoglou wrote. Grayscale and CoinDesk are both owned by Digital Currency Group (DCG).

The court argued that fraud and manipulation in the spot market posed a similar risk to both futures and spot products because the “spot bitcoin market and CME bitcoin futures market are so tightly correlated,” the report said.

JPMorgan notes that the court ruled there was no justification to allow futures-based bitcoin ETFs but deny spot ETFs. That's highly significant because it implies that for the SEC to defend its denial of Grayscale’s proposal to convert GBTC, “it would have to retroactively withdraw its previous approval of futures-based bitcoin ETFs.”

A retroactive withdrawal would be extremely disruptive and embarrassing for the SEC and therefore appears unlikely, the bank said.

Still, while the Grayscale ruling may bring closer to the eventual approval of a spot bitcoin ETF, “such an approval is unlikely to prove a game changer for the crypto market,” the note said.

Spot bitcoin ETFs have existed for some time outside the U.S., but have failed to attract considerable investor interest, and bitcoin funds overall, both futures-based and physically backed funds, have attracted little investor interest since the second quarter of 2021, the report added.

Spot-based ETFs allow investors to hold their positions indefinitely while eliminating the rollover cost associated with futures ETFs. The crypto market is optimistic that an eventual launch of spot-based ETFs will unlock floodgates to mainstream money.

Edited by Omkar Godbole.


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Will Canny is CoinDesk's finance reporter.