by Antonio Lanotte,
Chartered tax adviser and Senior auditor, Vernewell Mangement Group – CFE Tax Advisers Europe – Blockchain for Europe.
The recent victory of Grayscale against the SEC (see here the press release, editor’s note) has the potential to reshape the cryptocurrency investment landscape. It might signal a greater willingness among the financial elite to venture into digital currencies.
The recent court rulings in favor of Grayscale’s proposal for a Bitcoin ETF have stirred both the cryptocurrency community and the financial markets. These significant decisions could pave the way for the first Bitcoin ETF, a product that has been eagerly anticipated by many. Grayscale’s victory demonstrates a growing acceptance and recognition of cryptocurrencies as a legitimate asset class within the traditional financial system.
An ETF (Exchange-Traded Fund) for Bitcoin would provide institutional and retail investors with a more accessible and regulated way to invest in Bitcoin without needing to directly hold the cryptocurrency themselves. This development could lead to an influx of capital from institutional investors who have been waiting for a regulated investment vehicle before entering the crypto space. However, it’s important to note that while these court rulings are a positive step forward, there are still regulatory hurdles to overcome before a Bitcoin ETF can be fully launched and made available to investors. Regulatory concerns related to Market Manipulation, custody, and investor protection still need to be addressed.
The SEC and other regulatory bodies will likely continue to scrutinize proposed crypto ETFs to ensure they meet the necessary standards.
Background.
The SEC has postponed the approval of the ETF on Bitcoin requested by Ark Invest and 21 Shares (see here Reuters, editor’s note). This is nothing new. Until now, the US Securities Exchange Commission (SEC) has always rejected the various applications that have followed one another in recent years. Compared to the past, however, there is a different air that suggests that this postponement may only be such and not, as in past years, the prelude to a definitive rejection. In an 86-page document, the SEC invites 21Shares to present a series of calculations, complete with statistical documentation, demonstrating that the price of Bitcoin cannot be manipulated or, in any case, that action can be taken in the event of manipulation. The focus is thus to clear the field of potential market irregularities, in which case there would be inadequate protection of investors from potentially harmful activities. However, the wind in the industry seems to have changed, particularly since BlackRock, the world’s largest asset manager with close to $10 trillion in assets under management, has also made a move. Ceo Larry Fink has changed his narrative about the mother of cryptocurrencies. Until some time ago he described it as a tool for money laundering, while recently he has joined the ranks of those who call it a kind of “digital gold”.
The applicants.
BlackRock has an excellent track record with applications for financial instruments submitted to the SEC: out of 576 applications only in one case (in 2014) was it returned to sender. And that is why the Bitcoin community is confident that at this turn of history, the cryptocurrency’s coveted path to Wall Street can reach the finish line. This is also why the number of investment houses that have submitted a formal application to list an Etf on the spot (market) price of Bitcoin with the SEC continues to grow. As the table on the page shows, Bitwise, VanEck, Wisdomtree, Invesco & Galaxy, Fidelity, and Valkyrie are also in the field. Under the procedure, the SEC can adjourn up to three times before making a final decision for a total of 240 days maximum from the start of the examination to the final decision. Assuming it was to postpone all pending judgments (as it did for the one on Ark-21 Shares on 13 August), the final decision would have to come on 19 March 2024. This is an important date because it is close to a significant moment for Bitcoin, the halving currently scheduled for 17 April 2024.
The Halving.
What is Halving? Halving is basically Bitcoin’s monetary policy tool, through which every four years or so (more precisely every 210,000 transaction blocks added to the blockchain) Bitcoin issuance is halved. If today 6.25 are mined every 10 minutes (the average creation time of a transaction block), or 900 per day, from next April the amount issued will halve to 3.125 per block, or 450 per day. A tool designed to make Bitcoin rarer and rarer in such a way as to give it the scarcity effect that physical gold has in nature. Halving, particularly in the following months, has so far always been an important moment in Bitcoin’s price cyclicality. The four big bull runs of the price (which were then followed by four heavy bear markets) have always occurred after halving (with the price peaking in the following year). This is why the more mischievous speculate that the renewed pre-halving interest of the investment houses in pushing the SEC to approve the first ETFon Bitcoin’s spot price is also triggered by timing, by wanting to give their clients the opportunity to ride out the next possible bull run without having to go through the process of buying Bitcoin on exchanges or other poorly regulated platforms.
The Counter-attack.
Notwithstanding all this reasoning, the approval of the ETF could also be influenced, in terms of timing, by the litigation against Ripple Labs, the company that issues the XRP token, which, according to the ruling of New York’s Southern District Judge Analisa Torres, is not to be considered a “security” (non a financial product) when it is sold to the retail public via exchanges (see here Bloomberg and the Ruling by the Court)
The SEC does not stand for this and is preparing to counter-attack. In short, the game towards the ETF is still open and is likely to last as long as the SEC. However, should the SEC fail to win its battle against crypto-securities this time as well, it is expected that the eventual “approval” in chronological order of the ETF application on the bitcoin spot price could subsequently cause a domino effect for all other applications, especially those of BlackRock and Fidelity Investments, which are bound to make a lot of noise.
Conclusion.
If a Bitcoin ETF does eventually receive regulatory approval, it could provide a boost to the cryptocurrency market. The increased accessibility and legitimacy that an ETF offers could attract a broader range of investors, including those who may have been hesitant to directly invest in cryptocurrencies due to regulatory uncertainties and security concerns. In conclusion, Grayscale’s recent legal victories have the potential to reshape the investment landscape for cryptocurrencies by making them more accessible to a wider range of investors through the introduction of regulated ETFs. While these victories are a positive sign, it’s essential to keep an eye on how regulatory developments unfold and how they might impact the broader adoption and integration of cryptocurrencies into the traditional financial system.
