Cryptocurrency Decrypted: The SEC’s Final Dance with the Digital Dollar?

In late August 2023, the D.C. Court of Appeals issued a groundbreaking decision, celebrated as a victory for Grayscale Investments (“Grayscale”) seeking to convert its Grayscale Bitcoin Trust into a spot bitcoin exchange-traded fund (“ETF”). (Hannah Lang, et al., Reuters). However, the Appellate Court, like a magician teasing its audience, seized the coin mid-air, handing it over to the Securities and Exchange Commission (“SEC”), leaving the fate of Grayscale’s spot bitcoin ETF application at the hands of the Commission. (SEC). The coin landed on the side where the SEC approved Grayscale’s spot bitcoin ETF application, among other applications. Id. The implications of the SEC’s decision present both positives and negatives, but the long-term impact remains mostly unknown. This post will explore the SEC’s decision and its rationale, examining supporters and critics, and analyzing the implications for Grayscale and beyond.

On January 10, 2024, the SEC approved the listing and trading of several spot bitcoin exchange-traded products (“ETP”), a type of ETF. (SEC). The SEC approved Grayscale’s spot bitcoin ETF application, along with ten others, including BlackRock and Fidelity applications. (Mark Maurer, The Wall Street Journal; Crystal Kim, Axios). The SEC’s approval came one day after an unauthorized individual posted a fraudulent message on the Commission’s social media account on X, formerly known as Twitter, falsely claiming that the agency had approved the products to be traded. (Hannah Lang, et al., Reuters). The SEC quickly removed the misleading post. Id. Regardless, the SEC’s decision was in response to the D.C. Court of Appeals decision. (SEC). The Appellate Court vacated its decision and remanded the matter to the SEC to decide whether to approve Grayscale’s spot bitcoin ETF application. Id. The Commission ultimately decided to approve the listing and trading of Grayscale’s spot bitcoin ETF, citing various reasons. Id.

SEC Chair Gary Gensler rationalized the Commission’s decision by asserting that “investors today can already buy and sell or otherwise gain exposure to bitcoin at a number of brokerage houses, through mutual funds, [and] on national securities exchanges . . . .” Id. Notably, the SEC included a disclaimer that it remains merit-neutral and does not signal any willingness to approve listing standards for crypto asset securities. Id. Nonetheless, Gensler highlighted that the SEC’s decision provides three key protections for investors: (1) requirement of full, fair, and truthful disclosure about the products, (2) oversight of the regulated national securities exchanges to prevent fraud and manipulation, and (3) the Commission’s separate review of ten spot bitcoin registration statements to promote fairness and competition. Id.

Despite the SEC’s rationale in granting Grayscale’s spot bitcoin ETF application, its decision presents various implications for Grayscale. For starters, Grayscale must now regularly assess the spot bitcoin’s performance from the perspective of the investors involved. (Mark Maurer, The Wall Street Journal). Grayscale anticipates this feedback to be more intimate as they assume the role of service providers to their investors. Id. Grayscale will heighten its oversight by engaging in deliberate conversations about how the ETF is behaving or how it is performing in relation to the broader market infrastructure. Id. Additionally, the SEC’s decision poses a financial impact—managing an open-ended fund impacts the fees Grayscale earns. Id. Because the fees Grayscale issues in relation to the ETF are measured in the cryptocurrency (“crypto”), which is extremely volatile, its investment management fees will now be subject to the crypto’s volatility as well. Id. Third, the fact that bitcoin can be added or withdrawn from the Grayscale Bitcoin Trust, where the crypto is held, adds another layer of complexity to the investment management fees. (Mark Maurer, The Wall Street Journal; Hannah Lang, Reuters).

While the SEC’s decision has impacted Grayscale thus far, the spot bitcoin ETF may still offer positive growth for the company. (Mark Maurer, The Wall Street Journal). Some investors have been eager to invest in the spot bitcoin ETF, while other investors remain skeptical, evaluating its performance and assessing how their internal risk management views digital assets before taking any action. Id. Regardless, Grayscale is confident that the ETF is ideal for investors due to its oversight and built-in investor protection, being traded on the New York Stock Exchange. Id. While Grayscale is uncertain about how the ETF will impact its long-term growth, it appears prepared for any outcome. Id.

Despite spot bitcoin ETFs’ long-term unknowns, the SEC’s decision made tidal waves on the first day of the launch. (Kuala Lumpur, Bluefield Daily Telegraph). Reportedly, 700,000 transactions were made in the ETFs, with a trading volume reaching $4.33 billion, accompanied by a sharp increase in bitcoin’s value. Id. More than half of the trading volume, $2.2 billion, came exclusively from Grayscale’s ETF. Id. This is attributed to the fact that the Grayscale Trust existed for a decade, accumulating a large volume of assets when the SEC approved its conversion to an ETF. (Ian Allison, CoinDesk). It seems the initial launch day buzz has since waned as the value of bitcoin has decreased slightly. Id. Nonetheless, investors remain elated, citing that spot bitcoin ETFs provide more opportunity to engage with crypto without holding it and can pave the way for other innovative crypto products. (Hannah Lang, et al., Reuters). Yet, critics warn that bitcoin itself is still vulnerable to crypto fraudsters, and thus, investors should be wary of investing in spot bitcoin ETFs. Id. Despite critics’ forewarnings, spot bitcoin ETFs are already starting to see international uptake. (Prashant Jha, CoinTelegraph). Ten Hong Kong financial institutions have announced they intend to file an application to launch spot bitcoin ETFs with the Hong Kong’s SEC equivalent, the Hong Kong Securities and Futures Commission. Id.

It is clear the SEC’s decision is already creating a reverberating international impact and it will likely continue not only abroad but among those who have invested in the approved spot bitcoin ETFs. (Prashant Jha, CoinTelegraph; Kuala Lumpur, Bluefield Daily Telegraph). The impact of the spot bitcoin ETFs remains largely unknown, especially as this type of investment channel is unprecedented. Yet, the SEC’s decision has already presented diverse implications for Grayscale, manager of one of the eleven approved spot bitcoin ETFs. (Mark Maurer, The Wall Street Journal). Perhaps the SEC’s decision will lead to the Commission approving listing standards for cryptos in the near future, or perhaps the excited commotion will soon die down, leaving much to be desired. Whatever the future holds, the SEC has seemingly decrypted cryptocurrency—at least for select spot bitcoin ETFs, such as Grayscale’s.