Aug 31, 2023

The U.S. Securities and Exchange Commission (SEC) has 45 days to appeal a federal circuit court's decision saying the agency must review Grayscale Investments' application to launch the first spot bitcoin ETF.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. All right, a new report from German Bank. Barber said it is quite possible that the SEC will prepare alternative arguments to justify continued rejections of spot Bitcoin ef applications based on concerns about the spot Bitcoin market. Joining us now is Perkins coy partner and former sec enforcement lawyer, Keith Miller. Good morning, Keith. Good morning. All right, let's talk about this report, the gray scale developments. What concerns do you think the SEC is going to have moving forward? They of course, have 45 days to review the judge's findings here. What do you think is gonna happen? Well, it's been a bad two months for the SEC. Um First you had in July, you had the DC Circuit in a case. Cboe versus the SEC. The DC Circuit Court found that the SEC acted arbitrary capricious in violation of the Administrative Procedures Act. Then on Tuesday, uh we saw that uh the DC Circuit court once again found that the SEC acted arbitrary and capricious in violating the A P A um by failing to explain its reasoning in denying gray scale application. Um July also, we saw the ripple case, right, uh where the court held that secondary sales of XRP in not investment contract. So the last two months have been, you know, have shown um these decisions in particular, shown a crack in the S ECs Crypto Foundation. Um So I think the language that the court is using, um I think is important to look at um the, the sec the court is saying, you know, failed to provide reasonable and coherent explanations. OK. That's part of the, you know, the A P A is designed to allow people to redress agency issues. And that's exactly what they've done in at least these two most recent cases, right? July and, and, uh and, and August. So what happens from here, um, you know, is a lot of guesswork, but I suspect that you're going to see more and more people attempting to try to get into the market. For example, you've mentioned Elon Musk and trying to speculate on why is he trying to obtain money transmission license? He may be right? He wants to start slowly getting his ducks in a row. Ok. So if I can just jump in right now because I'm just, I'm very glad Keith, you said you use the word after, you know, after a certain point, what we're doing is guesswork, but you come from a position which can possibly be called and should be called expert. So yours is an expert opinion and yours is an expert opinion because you know how the SEC works. Yes, we can all accept the fact that this is perhaps an unprecedented situation even within the SEC because they've been enforcing, like perhaps never before what is happening inside the SEC right now in your best estimate. Yeah, I would tell you that. I'm sure people in the general's counsel's office and the commissioners, they're running around Francis frankly. Uh This is not a good decision for the SEC. Any time a court says the agency has acted arbitrary and capricious. That's not something you are going to write press release on notice. There is no press release by the SEC, right? And almost all the cases where there's a win, there's a press release, there's no press release here. So there's a lot of communication going on, you know, interesting, the court not only remanded it back down but also vacated the uh uh the order. Um And that's important because I think this is a showing. If you look at the DC court's rule and CBO A versus SEC last month, they simply remanded it back, right? They didn't vacate here, the court vacated and remand. I think that's a, that's a strong slap to the SEC saying, hey, guys, you really have to do treat people equally. That's what our equal protection clause is all about, right? Um You've seen these arguments come up fair notice, arguments and a lot of the cases, right? And it's about transparency. Um um There, there's of course three things that could happen here, the SEC could appeal, they could find another reason to reject like the Berenberg report is saying, or they could say, ok, um we, we will do what the court is saying, we'll review the application and we will approve it. How likely do you think it is that they come up with another reason to reject this filing again? This, this, this, the court is saying, look, you've got to treat people fairly and equally, right? And here they said there's no distinction, there's a distinction without any explanation of how to treat Bitcoin spot versus Bitcoin futures. And so I think the SEC is in a tough position and I think they're gonna have to seriously consider this. Now, a lot of this is, is political driven, quickly driven. Um So who knows, ultimately, if they decide to appeal this decision, the likelihood I think is, is that it's more likely that the SEC negotiates somehow with gray scale. Um And um that's, that's my best guess. What's, what, what would that look like? A negotiation with gray scale? What would that look like? Well, I think, you know, looking at the sharing agreements, um surveillance agreements and potentially trying to open them up a little bit more. Um That's the potential here. Um But again, the SEC is in the corner, it's a tough decision, but it's a tough decision to try to go to gray scale and say, let's negotiate. Um the court, like I said, not only remanded it but vacated it, basically saying this is not good. This is your explanations are not worthy. So, so let me just ask you for a prediction then because I know that it's a prediction in the world of guessing, but you know, you're, you're the closest we can get to experts in this space given your SCC background. So in that context, I just want to understand if you had to make a prediction right now, given the political, the landscape being what it is. Uh What's that? I think this is, like I said, I think this is a crack in the Se C's Crypto uh Cryptocurrency Foundation. I think you're going to see this crack become a crater. OK. And I think you're gonna see more and more. You've got lots of applications that are pending. OK. And the SEC now is if they're going to reject those applications, they have to somehow explain rationally why it's different than the two that they approve for Bitcoin futures. Um uh OK. So, yeah, no, that's a great metaphor. The, the, the, the, the crack metaphor. But uh I still, I still didn't get the answer. I think what you think about what is gonna happen. Yeah, I think it's more likely that the SEC is going to have to start approving these ETF S and I think this is, this is the opportunity for them to approve and move on. Um, we see, you know, look, I, I've been involved in the Bitcoin space since 2012. Ok. One of the first cases I represented was the first unregistered exchange. Ok. And then since then, I've been swamped with lots and lots of important cases dealing with exchanges, dealing with individuals, companies, so on and so forth. I've said over the last 4 to 5 years. Ok. And I've been in this area for over 10, the 4 to 5 years. The only way this is going to get solved is through legislation, right? The courts, yes, the courts are going to pick off cases here and there. We're starting to see court wins. We didn't see court wins back five years ago in the last two years. Three years. You're seeing court wins. That means the courts are disagreeing with the Se C's philosophy on Cryptocurrency, right? You see the struggle, the turf war between the SEC and CFTC that is being highlighted. You see more legislation. Um, and so, um, I think this is a total crack in the foundation because you're seeing courts disagree with the SEC. You're seeing Congress saying we've really got to do some who is the real regulator here. I don't think there's a dispute over regulating these assets. It's how to regulate them. All right. And just before we go, we got to ask you about the ripple case. Another, another case where the SEC took a little bit of a blow. Uh, how would you compare the ripple case to, uh, this Grayscale one? Yeah, they're, they're, they're, they're not necessarily, I mean, one is obviously dealing to with is a Cryptocurrency a security. And when, and how, and this obviously is completely different. We're talking about Bitcoin spot. The SEC has come out, um, a long time ago and said, we don't believe Bitcoin is a security. Um, but as the judge in the ripple case found, um, cryptocurrencies which are commodities, right can be securities. It depends how you sell and package them, you package them in a, in a pool or in a basket like an ETF it's a security but in and of itself them by themselves are not secure, right? So, um, I think that's how they compare, um, the, the, the, the ripple case. I would also say, you know, it is interesting because it stands, at least for my opinion, it stands for a proposition wants the security, not always security. And this is what we saw from the speech from the former director of corporate finance Bill Hinman where he came out and basically said that exact phrase, once security, not always a security, you have to look at the facts and circumstances every time and it could, you know, these assets could be securities. It's how they're sold, it's how they're packaged. It's what you say about them. Um And just because you say I'm gonna make an invest that, that it's an investment doesn't mean it's a security. Every commodity is an investment and that's one of the fallacies here is a lot of people say, well, but people are investing in this. So it's got to be a security. No, that's not true. You can invest a lot of things, you can invest in diamonds, you can. and you know, I think it's important to note that the when the judge ruled in ripple, the judge said, let you know and there's some experts on this, right? People are investing, why are they investing, you're investing in the market? Why do you invest in? Right? You don't know anything about whether the market's gonna you're investing in market, same thing with XRP and all these other ones. Yes, you may be investing per se. I hope it goes up but you're doing so because the market not because some individual or entity is going to give you a dividend or give you a piece of the action. OK. Uh final question for you. Um There's obviously experts like you, the journalists like us, we all kind of review what happens after a court order like that one. But there are also these, you know, experts, institutional experts like Bernstein, the German Bank, Beber Bernstein said in a research report that great skills landmark win is increases the likelihood that the agency might approve all Bitcoin spot ETF applications together. That was, I think on day one, after the order, on day two, we've seen German Bank said it is quite possible sec will prepare alternative arguments to justify continued rejections of, of these bought Bitcoin ETF applications. What would you say to a trader who is looking at these institutional expert organizations reviewing that order? You know, I I this is really, in my opinion, it's a political question. What does Chair Gez want to do? You've had two commissioners who dissented um in connection with the gray scale um um denial um at the SEC. So, um if Chair Gez wants to continue to say the SEC is the enforcer of Cryptocurrency, the SEC is going to uh make the rules on this. He, you see there, he's gonna find a way to put up more obstacles to delay this. There's no doubt. Um So this is a political question. I think the fact, you know what I think the fact that you see bigger, more traditional financial institutions coming into this space certainly helps the argument that we should treat all of them similarly. So I think the the likelihood is, is, is it's all political, in my opinion, it's, it's what chairs is going to decide at the end of the day. But I think, I think we are seeing this crack and I would say that it is more likely that the FEC starts approving these, maybe a few at a time, not all, at a time, but maybe a few to the extent they are similar. Sorry. II, I, sorry, Jen. I know we are completely out of time but I have to push back against what you just said because on the one hand you're predicting that it's likely that he's going to, you know, that they're going to slowly go ahead and approve these applications. But in the, if part of your answer was also that he's going to find a political way to block this. Yeah. II, I think, you know, it depends on what chair wants to do in this situation. If he wants to continue to stall, then there's gonna be other issues that he presents, right? And he's got it, got it. We're completely out of time. We, we appreciate that. Thank you so much. Got it. Ok. Thank you. Thanks so much for joining the show this morning. And that is an adorable dog you have on that picture frame behind you. Thank you. Thank you. That was Perkins coy partner and former sec enforcement lawyer, Keith Miller.

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