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Digital asset advocates cheered Tuesday after cryptocurrency wealth manager Grayscale won a resounding legal victory in its effort to offer a spot Bitcoin exchange-traded fund, sending Bitcoin’s price up 7 percent to nearly $28,000.

However, that doesn’t mean investors won’t have room to buy a grayscale spot ETF tomorrow. It also doesn’t immediately doom efforts by the US Securities and Exchange Commission to take enforcement action against some of the industry’s biggest players, including crypto exchanges Coinbase and Binance. The story of the regulator’s efforts to tame what it sees as the financial Wild West still has a lot to offer.

What did the court decide?

A federal appeals court ruled that the SEC wrongly denied Grayscale’s application to convert its flagship Grayscale Bitcoin Trust, which the SEC approved in 2015 and which holds more than $15 billion in Bitcoin, into an ETF. The SEC has allowed bitcoin futures ETFs since October 2021, but claims that cash funds are vulnerable to manipulation as crypto tokens are traded in largely unregulated markets.

Judge Neomi Rao wrote in the decision that the SEC’s rejection was “arbitrary and arbitrary because the commission failed to explain its differential treatment of similar products.”

“This is a monumental advance for American investors, the bitcoin ecosystem, and everyone who has championed bitcoin exposure with the added protection of the ETF shell,” Grayscale said in a statement.

What happens next?

The SEC has 45 days to decide whether to comply with the decision, ask the full federal circuit court in Washington for a review, or appeal directly to the Supreme Court. On Tuesday it was said that the decision was being reviewed.

Lawyers said Grayscale would have to file a new application for its ETF. However, there’s no guarantee it’ll be approved despite the court’s decision — the SEC could deny it for other reasons.

In fact, investors still seem to think Grayscale Trust’s conversion could fail. One reason Grayscale has long sought to convert its trust into an ETF is that, unlike ETFs, trusts often trade at a discount to their holdings. Even after Tuesday’s ruling, the Grayscale Trust was still trading at a discount of 20 percent, a sign that investors are worried a conversion is about to happen.

Financial reform group Better Markets suggested the agency could address the court’s concerns in another way — by canceling bitcoin futures ETFs rather than approving new spot products. The ruling “does not change the fact that the Bitcoin market is subject to fraud and manipulation or that an ETF would pose a serious threat to investors,” said Dennis Kelleher, chief executive.

What does this mean for other Bitcoin ETFs?

The first European spot bitcoin ETF started trading earlier this month. More than a dozen other applications are pending in the US, including some from the largest US wealth managers. They all face similar questions about preventing market manipulation and pricing the asset at the end of the trading day, lawyers said.

Although Grayscale has successfully challenged the SEC’s decision, there is no legal guarantee that it would jump to the front of the queue for review, said Teresa Goody Guillén, a partner at BakerHostetler.

The most closely watched ETF proposal comes from BlackRock, the world’s largest wealth manager. The filing was first filed on June 15, and on July 13, the SEC officially added BlackRock’s filing to its filing, followed by similar proposals from Invesco, VanEck, and WisdomTree. All of them have provisional deadlines this week.

SEC observers said the commission will most likely impose a 45-day delay, pushing decisions back to mid-October. “I think there’s a pretty reasonable chance that multiple products will be approved at the same time,” said Jeremy Senderowicz of the law firm Vedder Price.

What Does the Ruling Mean for Efforts to Regulate Crypto and Digital Assets?

Digital asset groups were thrilled with Grayscale’s win. Paul Grewal, Coinbase’s Chief Legal Officer, called it “a great moment for the industry.”. . .While we remain convinced that comprehensive state crypto legislation is the best way forward, decisions like these are an important step towards the clarity the industry needs.”

Guillén described Grayscale’s decision as a “devastating blow to the SEC.”

“This confirms that the SEC’s approach to cryptocurrencies has opened them up to legal challenges – whether as arbitrary and capricious, outside of their legal authority, improper rulemaking, etc.,” she said. “It certainly confirms that the courts are holding the SEC accountable for its legal obligations, including the SEC’s approach to crypto.”

The decision could nudge those who want to give more power over the sector to another regulator, the Commodity Futures Trading Commission, which oversees derivatives.

“This is a real loss of face for the SEC because of the language the appeals court used to punish them,” said Lewis Cohen of DLXLaw.

What Happens to SEC Enforcement Proceedings Against Crypto Groups Like Coinbase and Binance?

The Grayscale decision focused on the SEC’s administrative procedures rather than its legal power to regulate and enforce. As such, the case has no direct bearing on the regulator’s lawsuits alleging breaches of securities laws by exchanges Coinbase and Binance.

These cases were challenged in part by a previous lower court decision in an SEC enforcement case involving the Ripple token, when a judge found that the company had not violated securities laws when its tokens were traded by members of the public bought on secondary markets. The SEC is appealing the ruling, but if that decision stands, its efforts to regulate digital assets as securities would be weakened.

While Grayscale’s decision is legally clear, it can be used to further allege that the SEC misinterpreted the law, industry lawyers said.

“The crypto industry is calling this another example of SEC overreach.” . It’s throwing them out of control as an agency,” said Lee Reiners, who teaches a crypto law course at Duke University.

Additional reporting by Stephen Gandel in New York

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