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SEC's Grayscale Court Battle: Gensler's Agency Caught in a Tug of 'Will-They, Won't-They' Dynamics

Police & Regulations
Aug 30, 2023 at 02:38 pm

A decisive victory in court for the crypto spot-market ETF battle doesn't signify the end of the struggle; rather, it positions the SEC in a dilemma of whether to yield or persist, even as its authority diminishes.

Following a stern rebuke from federal courts, the U.S. Securities and Exchange Commission (SEC) finds itself compelled to reevaluate its stance on Bitcoin spot ETFs. Yet, the agency's previous objections are rendered ineffective, and a ticking clock adds urgency to the situation. Many insiders within the crypto industry suggest that the most sensible course of action for the SEC is to concede.

The crypto sector's relentless pursuit of establishing exchange-traded funds (ETFs) has brought the SEC to a crossroads, thanks to Grayscale Investments' consequential legal triumph. Despite this, the decision to retreat or continue the battle still rests with the agency.

Dan Berkovitz, former general counsel at the SEC, remarks, "It's back in the SEC's court." Should the SEC intend to reject Grayscale's Bitcoin ETF once more, it must present entirely new reasons, an arduous task it has yet to undertake. The unanimous panel of judges' label of the SEC's judgment as "arbitrary and capricious" casts a shadow on its credibility. Pat Daugherty, an ex-SEC lawyer representing crypto clients, explains that the SEC's inability to justify approving Bitcoin futures-based ETFs while rejecting a Bitcoin-based one reveals an inconsistency that contradicts the principle of equal treatment under the law.

At stake is a financial product that could attract fresh investors to the crypto realm, even though the SEC has deemed it too risky. The SEC, now led by Chair Gary Gensler, is presented with various choices: appeal the ruling, grant Grayscale's Bitcoin spot ETF application, permit automatic approval through inaction, or initiate a new attempt to reject the application based on new objections. While the industry is rejoicing over this pivotal moment, perceiving it as a prelude to the end of the SEC's crypto roadblock, Gensler's skepticism toward crypto and his concerns about its risks remain well-known.

The court's rebuke carries significant implications. "Arbitrary and capricious" are terms Gensler would not want to hear from federal courts. The SEC's skepticism towards ETFs contrasts with the unanimous court panel's stance, leading to questions about the agency's anti-ETF position.

The SEC's next steps are under review following the court's decision. With the original rejection of Grayscale's application now nullified, the countdown to the SEC deadline restarts. While many anticipate the SEC to clarify the timeline soon, the smart move, according to Daugherty, is for the SEC to swiftly approve Grayscale's application. Whether Gensler shifts his approach or not could be influenced by congressional Democrats.

A former Republican SEC commissioner suggests the agency might craft another rejection. The SEC's response to this setback will either involve devising a different reason for denying Grayscale's proposal or acknowledging the court's ruling as a graceful exit from their anti-ETF stance.

Court battles have not been kind to the SEC, with a history of defeats. This particular repudiation, however, targets a position that the SEC should reject a specific financial project, revealing a departure from the agency's tradition of inaction.

Berkovitz notes that the agency's authority has diminished, as the deference it once enjoyed is no longer freely granted. The agency's successive losses further erode its standing.

The bipartisan judicial panel's rejection of the SEC's decision is unprecedented, embodying a restored bipartisanship. Regardless of Grayscale's ultimate fate, the ruling could invigorate other ETF endeavors.

This decision doesn't guarantee approval for Grayscale's Bitcoin ETF, but it could pave the way for approving other ETF applications with strong information-sharing agreements. Weak surveillance has been a major concern for the SEC, and the ruling could lead to approving projects with robust surveillance plans, safeguarding consumers.

Coinbase, a crucial player in surveillance, acknowledges that regulatory clarity is emerging from the courts, where the SEC has been reticent. Dennis Kelleher of Better Markets suggests the SEC should stand firm due to the potential for fraud and manipulation in the Bitcoin market.

Amidst mixed sentiments, Gensler's SEC finds itself at a crossroads, a critical juncture that will inevitably shape the crypto landscape's regulatory trajectory.

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