JP Morgan analysts, led by Nikolaos Panigirtzoglou, have indicated that the US Securities and Exchange Commission (SEC) will soon have little choice but to green-light multiple applications for Bitcoin exchange-traded funds (ETFs) in cash. This prediction comes on the heels of Grayscale’s recent lawful victory against the SEC.
Nikolaos Panigirtzoglou is a Managing Director of JP Morgan and operates from London, focusing on the worldwide market strategy spanning alternatives and digital assets. He is the editor of the weekly Flows & Liquidity report, an elementary publication of JP Morgan.
As you may recall, on August 29, the US Court of Appeals for the DC Circuit ruled that the Securities and Exchange Commission (SEC) should review Grayscale Investments’ request to convert its “Grayscale Bitcoin Trust” product into a spot Bitcoin ETF.
Circuit Judge Neomi Jehangir Rao stated (as part of the court’s opinion on Grayscale’s “Petition for Review of an Order of the Securities and Exchange Commission”):
“It is a fundamental principle of administrative law that agencies should treat similar cases equally. The Securities and Exchange Commission recently approved two bitcoin futures funds for trading on national exchanges but denied approval for Grayscale’s bitcoin fund. In seeking a review of the Commission’s denial order, Grayscale contends that its proposed bitcoin exchange-traded product is materially related to bitcoin futures exchange-traded products and should have been approved for listing on NYSE Arca. We agree. The rejection of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products. We therefore agree to Grayscale’s request and cancel the order.”
Proponents believe that a spot Bitcoin ETF would streamline investing for the average person by eliminating the need for direct Bitcoin transactions and reducing custody-related risks. The ruling has reignited optimism among a new batch of applicants waiting for its approval, especially given the SEC’s track record of rejecting all previous Bitcoin ETF applications.
On Aug. 31, the SEC postponed decisions on spot Bitcoin ETF applications from several firms, including BlackRock, Fidelity, and Invesco, until mid-October.
Why is the Court´s decision so important?
Last Friday, JP Morgan highlighted that the court found no valid reason for the SEC to approve futures-based Bitcoin ETFs and reject spot-based ones. This is important because, in order to justify its rejection of Grayscale’s strategy of turning GBTC into a spot ETF, the SEC would need to reverse its previous approvals of futures-based Bitcoin ETFs. According to the bank, such a move would be highly disruptive and damaging to the SEC’s reputation, making it an unlikely course of action.
However, the bank also noted that even if Grayscale’s lawful victory makes approval of a spot Bitcoin ETF more likely, it will not necessarily be a transformational event for the cryptocurrency market. Spot Bitcoin ETFs have been available in Canada and Europe for a while, but have not attracted significant investor interest. Additionally, Bitcoin funds in general, whether futures-based or physically backed, have seen limited investor participation since the second quarter of 2021. Additionally, analysts argue that the returns of spot Bitcoin ETFs based on futures are relatively minor.
By Leonardo Pérez
