Grayscale may have won its ETF battle with the SEC, but can it win the war between crypto and the U.S. financial system?

Grayscale led the fight at the Securities and Exchange Commission (“SEC”) for approval of spot bitcoin-exchange traded funds (“ETFs”). The battle began in 2022 after the SEC rejected Grayscale’s application to convert its bitcoin trust into a spot bitcoin exchange-traded fund because spot markets are unregulated and susceptible to fraud and market manipulation. Any Crypto-based attorney will tell you that the SEC has a long way to go in regulating these new products.

In June 2023, the SEC approved the first ever leveraged bitcoin futures ETF, which gave Greyscale the ammunition it needed to march into battle with the SEC to get its own bitcoin spot-based ETF approved. Greyscale argued that, by denying bitcoin spot-based ETFs, the regulator was treating similar bitcoin investment products differently. Rather than raising the white flag, Grayscale further argued that distinguishing between bitcoin futures and bitcoin spot markets is flawed because the two are interrelated in that bitcoin futures prices closely tracked bitcoin spot markets. Unlike a futures-based ETF, spot-based ETFs own actual bitcoins and are stored in a digital vault managed by registered custodians. Futures-based ETFs replicate bitcoin prices using futures contracts.

Grayscale experienced a major victory on August 29, 2023, when a federal court ruled that the SEC’s decision to approve two bitcoin futures funds while rejecting Grayscale’s application to turn its bitcoin trust into a bitcoin spot ETF was [“arbitrary and capricious”]. Further, the court found that the SEC’s denial was in violation of federal administrative law because the SEC failed to explain its inconsistent treatment of similar products.

Grayscale’s victory forced the SEC’s hand in approving 11 applications filed by asset managers including Valkyrie, Invesco Galaxy, WisdomTree, Bitwise Asset Management, ARK Investment Management, Fidelity Investments, and Blackrock. Grayscale views its victory as bridging the gap between the U.S. financial system and bitcoin. Grayscale’s victory has sparked a fee war amongst asset managers. This hypercompetitive ETF market has made trading cryptocurrency through ETFs a lot cheaper than purchasing it through crypto exchanges. In response to the fee war, Grayscale Bitcoin Trust slashed its already-high 2% management fee to 1.5%. After generating approximately $12 billion in outflows, Grayscale’s CEO Michael Sonnenshien said that the Grayscale Bitcoin Trust will continue to lower its fees in the coming months as the crypto ETF market matures.

According to Grayscale’s Chief Financial Officer Edward McGee, “wrapping bitcoin in a security wrapper traded on a national securities exchange sitting alongside other investments is a fantastic thing for the investor to have the option to pursue.” No longer must investors deal with the obscurities of buying and selling cryptocurrencies through trading on crypto exchanges and incurring heavy transaction fees or purchasing products that track bitcoin in intricate ways. Now, investors can buy or sell cryptocurrency as easily as they can buy or sell a stock or bond. However, unlike equities and bonds, bitcoin ETFs do not generate cash flow and lack intrinsic economic value.

In the wake of these fund approvals, investors should be weary of financial advisors recommending that clients allocate funds to bitcoin. It is important to be aware of the risks of crypto ETFs. Crypto ETFs are speculative, volatile, high-risk products, and investors risk losing their entire investment. Crypto ETFs have regulatory risks because there is no established regulatory framework to protect investors from fraud, manipulation, and loss of assets. Investors are exposed to security risks such as cyber theft. Also, investors are susceptible to tracking errors between the ETF share cost and bitcoin value and high management fees. In a 2023 survey conducted by the Journal of Financial Planning and the Financial Planning Association, cryptocurrency was at the bottom of the list of what advisors were using in their clients’ portfolios. Vanguard expressed its distrust in bitcoin ETFs as being the antithesis of its longstanding focus on generating long-term investment profiles to save money to achieve investment goals such as retirement.

Make no mistake, any recommendation is subject to the new tighter “best interest” standard of Regulation Best Interest. Any “call to action” to buy these investments must be in the investors’ best interest and follow Regulation Best Interest’s four pillars to make sure the recommendation is well thought out, appropriate, researched, and sound, not in conflict with the client.

If you have suffered a high percentage of losses in a short period of time with crypto, consult with a New York Crypto-Based lawyer at Malecki Law, to evaluate your potential claim.

Before Grayscale’s battle with the SEC, the Grayscale Bitcoin Trust, (“GBTC”) was one of the few options for individual investors to dip their toes into bitcoin without having to purchase the cryptocurrency outright. Grayscale ultimately challenged the SEC’s decision in an attempt to provide its investors with increased liquidity, which is a beneficial feature of ETFs in comparison to existing crypto products. Grayscale’s longstanding history, dating back to 2013, has built a false foundation of trust for investors who are unaware of volatility risks, security risks, regulatory risks, management fees, tracking errors, and misuses that are inherent in investing in this speculative, high-risk product. Grayscale products are not in the best interest of an investor who cannot afford to lose their entire investment, and if you have suffered significant losses from crypto products, you need to consult with a Crypto-Based law firm in New York, like Malecki Law, to assess your potential claim.

Grayscale’s Bitcoin fund is the largest with $22.9 billion in assets and today holds 3.16% of all bitcoin in circulation. On its first day on the New York Stock Exchange, the Grayscale Bitcoin Trust saw $2.3 billion in trading volume. With Grayscale ads at more than a dozen major airports in the U.S., and NYSE displaying Grayscale’s banner over its walls, the crypto bug has been itching its way into investors’ pockets.

How long will Grayscale be able to ride on their victory? Grayscale’s post-battle frenzy may have forced the SEC’s hand, but the SEC may be hesitant to cast a wider U.S. regulator safety net for future approvals due to its emphasis on the need for heightened investor protection and more regulation when dealing with cryptocurrency. Historically, the SEC’s rejection of such funds can be traced back to 2017. Despite the SEC’s approval of the latest ETF applications, the SEC “did not approve or endorse bitcoin.”

The SEC’s approval may open the floodgates for other cryptocurrencies pawning for SEC approval, making investors susceptible to the risks and volatility associated with products whose value is derived from crypto. Grayscale may have won its ETF battle with the SEC, but the crypto and U.S. financial system war is just beginning.

If you have crypto in your portfolio that you were unaware of, and suffered significant losses, consult with a NYC Crypto-Based securities law firm, like Malecki Law, to evaluate your potential claim.


Contributions by Rosemarie Smerina, New York Law School Securities Arbitration Seminar and Field Placement Extern.

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