Grayscale CEO predicts a crypto environment 'we haven’t seen before' after legal win

Grayscale Investments CEO Michael Sonnenshein predicted that the stage is now set for "an environment around crypto that we haven’t seen before" after what he called an "overwhelming victory" this week over the Securities and Exchange Commission.

A three-judge panel of the District of Columbia Court of Appeals in Washington said Tuesday the SEC was "arbitrary and capricious" when it denied an application from Grayscale to convert its Grayscale bitcoin trust (GBTC) into a spot bitcoin exchange-traded fund.

A spot bitcoin ETF would allow investors to get exposure to the world’s largest cryptocurrency without having to own it, possibly expanding mainstream acceptance of digital assets.

Sonnenshein said in an interview with Yahoo Finance that the decision "was an overwhelming victory not just for Grayscale and our investors but for the investment and crypto communities as a whole."

The decision could bolster the chances for other asset managers to win approval for their bitcoin products. The world’s largest money manager, BlackRock (BLK), filed paperwork with the SEC in June to create a spot bitcoin ETF. Coinbase (COIN) would be the custodian for those bitcoin holdings.

'We have to be a little bit patient'

But it is not yet clear that spot bitcoin offerings are a sure thing. The ruling from the federal appeals court only requires the SEC to review Grayscale's application, not to approve it. And the SEC has until mid-October to request a re-hearing of the case. It has said it is reviewing the decision.

"We have to be a little bit patient," Grayscale's Sonnenshein said.

The uncertainty may help explain why a rally in cryptocurrencies companies and digital assets fizzled on Wednesday after rocketing higher Tuesday in the hours after the Grayscale ruling was disclosed.

Bitcoin (BTC-USD) briefly touched $28,000 by late Tuesday afternoon but had dropped near $27,000 on Wednesday. It is still up 64% from the start of the year.

The stock of Coinbase fell 1.2% Wednesday while bitcoin mining firms Marathon Digital (MARA) and Riot Blockchain (RIOT) were down 3% and 2.4%, respectively. All three surged by double-digit percentages on Tuesday, and are up considerably year to date.

The Grayscale bitcoin trust, the largest trust holder of bitcoin in the world, was down more than 4% Wednesday and traded at an 18% discount, according to YCharts.

If the trust is allowed to convert into an ETF, the discount would be immediately eliminated.

The wider war

The SEC is fighting battles with the cryptocurrency industry on a number of other fronts. Since the beginning of 2023, the SEC has charged 19 different crypto actors with violating securities laws, including exchanges like Coinbase and Binance that allow investors to trade digital currencies. The Grayscale decision does not impact those cases.

The SEC’s core assertion in many of these securities law cases is that cryptocurrencies are securities, and therefore should be registered with the agency.

But the courts thus far have not been clear on how digital currencies should be treated, raising uncertainty around how the government's crackdown could play out.

Analisa Torres, a US judge in the Southern District of New York, said on July 13 that a digital token issued by Ripple Labs was a security only when it was sold to institutional investors, and not when it was purchased by the general public.

Then July 31, US judge Jed Rakoff disagreed with that specific view in his case, in which the SEC has alleged stablecoin issuer Terraform Labs sold unregistered securities.

He determined that how a crypto token is sold — whether through an exchange or directly to institutional investors — does not determine whether any reasonable investor would expect the promise of profits. Rakoff ruled the SEC's case against Terraform Labs founder Do Kwon could proceed.

'The staying power of the asset class'

Sonnenshein said he is encouraged that the recent legal decisions combined with some movement in Washington around legislating the crypto world will provide momentum for the industry.

Last month, the Republican-led House Financial Services Committee passed legislation out of committee that aims to create clarity around gaps between the rules of the Commodity Futures Trading Commission (CFTC) and the SEC.

The bill provides the CFTC with jurisdiction over digital commodities and clarifies the SEC's jurisdiction over digital assets offered as part of an investment contract. It also tries to direct what firms need to do to register with the SEC and requires the SEC to write new rules that are customized to govern crypto.

"It is encouraging to actually see crypto becoming a nonpartisan issue," Sonnenshein said.

Next year, he added, the industry could get another boost when when the bitcoin blockchain gets a supply cut that could raise the price of that cryptocurrency relative to other digital assets.

There are "some catalysts that could be really, really unique to continuing to underscore the staying power of the asset class,” he said. It could mean "an environment around crypto that we haven’t seen before."

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