Guess who’s back? Not me. I never actually left and will always be here for all of your crypto curiosities. But crypto is slowly regaining some steam. After getting pummeled in the last twelve months, crypto has quietly built some momentum with a series of wins in the past few months.
In the words of the bard of our times:
I gave you all summer to catch up on your Nantucket beach reads, but now it’s time to dig in.
The quest for a Bitcoin ETF has gone on nearly as long as a Lord of the Rings movie. The first application was back in 2013 by the Winklevii when Bitcoin was trading at $88.05. In fact, one of the first issues of Crypto Curious discussed the SEC denying Grayscale’s attempt to convert their closed-end fund into an ETF (we’ll come back to that shortly). Many have piled in over the years: VanEck in 2020, Fidelity, Invesco and Kathy Wood’s ARK Fund in 2021.
But ears perked up this summer when BlackRock filed for their own Bitcoin ETF. With $9 trillion in assets, BlackRock is the largest asset manager in the world. BlackRock is also known for very strong ties to Washington D.C. across the political spectrum so many observers something was afoot with their timing. They also have an impeccable track record with getting ETFs approved. Of the 576 ETFs that Blackrock has applied for, 575 of them have been approved. For the visual learners out there, I’ve charted it for you:
Why does it matter? Well, despite progress, it still remains relatively hard to buy and hold Bitcoin, much less Ethereum or other crypto products. You can:
Even for institutions, all of this is similarly complicated. And 401(k)s ($7 trillion of assets) and IRAs ($12 trillion) are almost completely shut out from investing in crypto. It’s improving slowly, but while most capital (at least in the U.S.) can easily flow into shares of Apple, getting Bitcoin exposure is difficult. So almost as long as Bitcoin has been around, proponents have expected that the launch of a spot (i.e. non-futures based) ETF would open the floodgates for whole new realms of capital.
Sure enough, however, that day may come soon. This week, Grayscale won a major judgment against the SEC won and a Bitcoin ETF looks, if not imminent, then at least highly likely to happen in the near term (Bloomberg’s ETF experts now have a 75% chance of a Bitcoin ETF launching this year and 95% by the end of 2024).
Grayscale had been repeatedly denied permission to convert GBTC into an ETF, so last June they filed suit in federal court. On Wednesday, in a highly unusual rebuke, the court voted 3-0 in Grayscale’s favor and vacated the SEC’s denial which they called “arbitrary and capricious.”
The judges were not particular kind to the SEC:
This does not mean that GBTC can immediately convert or that the other ten Bitcoin ETFs in the queue are automatically approved. It just means that the SEC will have to change the reasons for their denial. At this point they can:
Post FTX, I might have thought that the SEC would come up with some new reasons for denial as they’ve shown some solid creativity in the past, but now I think a graceful exit is a bit more likely. This ruling got pretty extensive coverage in the NYT, WSJ, and CNN amongst others and this may not be the situation to double down given the SEC’s shaky ground.
Especially since six weeks earlier this summer, the SEC took another “L” in court as U.S. District Judge Analisa Torres ruled against the SEC in their case against Ripple. In the last days of the Trump administration, the SEC sued, claiming Ripple violated investor-protection laws when it sold its XRP token as an unregistered securities offering. “If other courts follow this reasoning, that is a major problem for the SEC,” said Marc Fagel, a former director of the SEC’s San Francisco office.
Matt Levine summed it up best (as he always does):
Look, despite sorta knowing some of the people at Ripple, I wouldn’t quite call it a scam, but it’s perhaps a bit too scam adjacent? I would definitely say that for having a $26 billion market cap (the 4th largest crypto market cap) and having made a lot of insiders insanely wealthy, I would have liked to have seen way more progress out of them. XRP kinda sorta sounds like a security to me and it’s been pretty heavily marketed with a suspiciously strong social media fan base.
As a broadly pro-crypto dude, this is not the case I would hang my hat on. Ripple is a long way from FTX, but also has not been a great representative for the crypto industry. Judge Torres’ ruling also seems shaky and I think there are valid questions of if it will hold up. But it is notable in providing another roadblock on Gensler’s March to the [Crypto] Sea.
More recently, on Thursday crypto notched another less noticeable, but significant win in U.S. District Court for the Southern District of New York (SDNY). Judge Katherine Polk Failla dismissed a class-action lawsuit against Uniswap, a decentralized exchange. The plaintiffs lost money on a number of scam tokens that they purchased via Uniswap, blaming the platform for their losses on these “unregistered securities.”
Judge Failla compared the accusations to holding a self-driving car developer liable for a driver who used the vehicle to rob a bank. She further compared it to “attempting to hold an application like Venmo or Zelle liable for a drug deal that used the platform to facilitate a fund transfer.”
This has been an ongoing issue around crypto as an emergent and unique technology that may not fit into existing frameworks. We accept that Verizon is not responsible for illegal activity that takes place on calls over its networks. Section 230 protects Internet platforms from liability for what their users post. Even gun manufacturers cannot be held liable for the use of their products in a crime.
To many crypto enthusiasts, these same principles should apply to the protocols and blockchains that power crypto (i.e. regulate and monitor the edges, not the middle). But to this point, many regulators have gone after the code itself and the issue has not been definitely settled. Many are encouraged that this ruling may help establish some precedent.
It is also encouraging that Judge Failla and, indeed, many of the judges ruling on these cases, seem to understand some of the nuances and subtleties of crypto. Crypto can be a weird hybrid of lots of different models and it requires a bit more time and effort to deeply understand. We’ve seen a number of politicians who seem unable or unwilling to invest in learning about the technology, but so far the Federal judges have been much more open minded. It is also worth noting that Judge Failla is also presiding over the SEC vs. Coinbase litigation, a case that could end being widely impactful in its final ruling.
Crypto is hardly out of the woods in the regulatory arena, but it has been encouraging to see the judicial system provide a counterbalance to some aggressive regulation.
As always, thanks for reading. Send me questions and please share with your crypto curious friends.
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