Grayscale faces ETF war after winning bitcoin battle

Hello and welcome to the latest edition of the FT Cryptofinance newsletter. This week, we’re taking a look at Grayscale’s victory in the US courts.

Many previous editions of this newsletter have covered regulators punching at every corner of the crypto industry, from the largest crypto exchange to obscure lines of code.

This week, the tables turned.

Asset management firm Grayscale, which holds roughly $17bn in bitcoin, won a landmark case against the Securities and Exchange Commission when a Washington DC court ruled that the regulator was wrong to reject the company’s application to convert its flagship product into a bitcoin-backed exchange traded fund.

A spot bitcoin ETF has become something of a crypto holy grail — a way to trade bitcoin that is cheap, safe and wrapped in a well-understood regulatory wrapper. To say the crypto market was delighted is an understatement.

“An SEC-regulated bitcoin ETF would unlock the next generation of crypto adoption, allowing trillions in institutional capital to come off the sidelines,” said Diogo Mónica, co-founder and president of Anchorage Capital.

Bitcoin leapt roughly 7 per cent after the ruling. I’d say such excitement over the prospect of a spot bitcoin exchange traded fund potentially happening at some point in the future, is a reflection of the failings of that global financial revolution bitcoin’s founder promised 14 years ago.

Still, the victory is a rare oasis of optimism for a space so often set back by scandals. Potentially great for the industry, but at what cost to Grayscale?

Even before the hard-charging Gary Gensler became chair of the SEC, the agency had a consistent record of punting applications to launch a bitcoin spot ETF.

Some have had specific reasons but the SEC has long argued the asset that underlies it all — bitcoin — trades on largely unregulated exchanges that may be susceptible to market manipulation.

Grayscale won because it focused on the SEC’s weak spot — that the regulator had given the green light to bitcoin ETFs that track futures on the token, traded on the CME.

Futures and their underlying assets are closely linked. While the CME can attest to the orderliness of its own market and the way prices are formed and fed into it, the underlying market can still be manipulated. Market makers arbitraging prices just help close the gap.

The judge, Neomi Rao, agreed that this stance was odd and called the denial of Grayscale’s application “arbitrary and capricious”. The ruling didn’t permit a spot bitcoin ETF, and only told the SEC to go away and rethink its justifications for its denial.

But while Grayscale has been fighting it out in court, others have been banging on the SEC’s door this summer with their own bitcoin ETF applications. They include BlackRock — the largest money manager in the world — and other household names such as WisdomTree and Fidelity.

Should the ruling finally open the door to spot bitcoin ETFs, Grayscale is likely to be up against a host of household ETF names in the battle for customers. None of them come associated with the crypto crash of 2022.

“Retail investors and institutions alike may be attached to bigger names. If so, Grayscale made the legal investments to win this case, but having knocked the door down their competitors may walk right through it, marching on Grayscale’s back in the process,” Peter Fox, partner at Scoolidge, Peters, Russotti & Fox, told me over the phone.

More importantly, these rivals are all very accustomed to serious price competition. Grayscale earns a 2 per cent management fee on the bitcoin it holds — at present worth about $17bn. BlackRock, Invesco, etc are used to charging fractions of that total.

Others, such as Jeremy Senderowicz of law firm Vedder Price, are more optimistic. “Grayscale has a pretty established name for bitcoin products and they’re staring off with an asset base in their fund that nobody else has,” he told me, referring to the fact that Grayscale is one of the largest holders of bitcoin on the planet.

But it’s not hard to imagine the likes of BlackRock quickly scooping up their own stash of coins, either. It’s also important to remember the court’s decision does not by any stretch compel the SEC to approve Grayscale’s application: however unlikely, the regulator could revert with an entirely new rationale to reject the company’s ETF ambitions all over again.

Overnight the SEC again deferred all the main spot bitcoin ETF applications filed this summer.

Still, the expectation is growing that spot bitcoin ETFs will make landfall in the US at some point.

If and when the day comes, the SEC will probably approve several ETFs at once, rather than granting one player a potentially unassailable first-mover advantage.

“That means this becomes a market share game. So on percentage share and take-rate, Grayscale revenues should decline significantly,” Ram Ahluwalia, chief executive of investment adviser Lumida Wealth Management, told me.

What’s your take on Grayscale’s court victory over the SEC? As always, email me at scott.chipolina@ft.com.

Weekly highlights

Despite a setback in ETF land, the SEC’s push against all crypto-related activity continues unabated. On Monday it charged media and entertainment company Impact Theory LLC with conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens. The company agreed to a cease-and-desist order without admitting or denying the SEC’s findings.
On Thursday industry giant Binance said it would “gradually” cease support for BUSD products, advising users to convert into other stablecoins before February 2024. The news doesn’t come as a surprise after New York regulators halted further issuance of the coin in February this year, but it serves as a reminder of the impact of regulatory action: Binance’s share of the crypto trading market has fallen from roughly 57 per cent to 38 per cent following the New York Department of Financial Services aiming its crosshairs on BUSD.

Soundbite of the week: Crypto gets its latest cheerleader

Crypto has a new high-profile political supporter: Vivek Ramaswamy. The biotech entrepreneur turned Republican presidential candidate has made waves for describing the climate “agenda” as a “lie”, and outlandish promises to fire 75 per cent of all US federal government employees.

Ramaswamy took to social media platform X this week to celebrate Grayscale’s victory in court over the SEC, suggesting the federal courts (presumably he’d like to keep those running) as the only defence against overreaching agencies such as the SEC.

“The shadow government in D.C. is out of control & the federal courts are our *only* remaining line of defence against the unlawful rogue behaviours of 3-letter government agencies. This decision is strong and clears a path to keep Bitcoin & blockchain innovation in the US instead of overseas.”

Data mining: Grayscale added over $1bn in AUM after court victory

Grayscale’s flagship vehicle, Grayscale Bitcoin Trust, added nearly $1.2bn in assets under management on August 29 and 30 following the asset manager’s victory in the courts. That added 7 per cent to its total, bringing it to $17.4bn in assets under management, according to figures from provider CCData.

Still, that was only a minor ray of sunshine in a poor August. The digital asset market had a 12 per cent decline in assets under management last month, to $29.7bn. Grayscale itself was managing more than $18bn only two weeks ago.