Securities and Exchange Commission Chair Gary Gensler would likely consider his regulation-by-enforcement approach to the cryptocurrency industry largely successful, but it has suffered high-profile setbacks this summer. The latest was a recent ruling in the U.S. Court of Appeals for the District of Columbia Circuit, where the panel sided with Grayscale Investments in its bid to convert its bitcoin trust into a bitcoin spot exchange-traded fund. In the decision, the three-judge panel ruled that the agency’s reasoning for rejecting Grayscale’s conversion attempt was “arbitrary and capricious,” forcing the SEC to re-evaluate the company’s proposal.
While some industry members celebrated the decision as paving the way for the emergence of bitcoin spot ETF, there is reason to be cautious. The agency could appeal the court’s ruling or again deny the attempt in a way that it has not previously used to block similar applications. Past rejections, including Grayscale’s bid, have hinged on the argument that those offering the product could not sufficiently prevent fraud or manipulation in the underlying market. Some see this as an inconsistency when the agency has approved bitcoin futures ETFs and the markets are closely correlated. The notable difference is these futures trade on the Chicago Mercantile Exchange, a U.S. commodities exchange regulated by the Commodity Futures Trading Commission, and no comparably regulated exchange exists for the bitcoin spot market.
If Grayscale’s conversion is approved, bitcoin spot ETFs would likely flood the markets. Several companies, including BlackRock
What the decision will not change is any interest from Gensler in continuing his regulation-by-enforcement approach, even if there are future court challenges. There has been no slowdown since the SEC’s first significant defeat in its case against Ripple, which it is appealing, and there is little reason to expect that to change now. Just one day before the Grayscale ruling, the agency settled with Impact Theory in a first-of-its-kind enforcement action, alleging that the company’s sale of non-fungible tokens, or NFTs, violated securities laws. For Gensler, continuing to pursue these novel cases is critical in claiming the SEC’s regulatory jurisdiction. With so little case law and regulation of the industry to date, Gensler appears to view these actions as the best means to secure the agency’s territory.
If these court losses are only temporary roadblocks for Gensler, the body that could force a more permanent detour is Congress. The crypto industry has made significant inroads in the legislature recently, particularly with House Republicans. Just before the August recess, the House Financial Services and Agriculture Committees passed a market structure bill for digital assets to clarify tokens’ legal status, limiting the SEC’s jurisdiction. The bills passed with some Democratic support and could advance out of the lower chamber, but it is unlikely to go further in the current Congress. The Senate has tended to show more skepticism about the industry, prioritizing efforts to limit crypto’s use for illicit activity. Passage in the House would be a landmark accomplishment, but turning the bill into a law is not realistic at the moment.
Unfortunately for industry members, as long as the Congressional gridlock continues, Gensler and other agency heads can operate with the courts as their only check. With legislation likely years away, the best chance for an improved regulatory environment for digital asset businesses will be a Republican president in the White House after the 2024 election. Even if this is not the long-term certainty the crypto industry would like, it could mean fewer clashes and a less combative relationship. It may even be a collaborative partnership if SEC Commissioner Hester Peirce, nicknamed “Crypto Mom,” and like-minded regulators come into power.