Court Decisions Further Complicates Crypto Regulation

The Securities and Exchange Commission has suffered yet another loss on a cryptocurrency issue in court, adding more upheaval to the messy process of building a new regulatory regime from scratch.

The latest legal setback came in the form of a decision from the U.S. Court of Appeals for the D.C. Circuit. A three-judge panel vacated the SEC’s decision to block a proposal from a major crypto fund manager to launch an exchange-traded fund for Bitcoin. In their ruling, the judges admonished the agency for denying the ETF proposal from Grayscale Investments LLC without a valid explanation, a sign that the urgency to better regulate digital currencies may be leading to haphazard work on the SEC’s part. The decision noted that the SEC didn’t adequately explain what made Grayscale’s proposed fund different from similar products involving Bitcoin futures that received regulators’ blessings.

“In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful,” the judges said.

The SEC had rejected Grayscale’s initial spot ETF application in June 2022, stating that the firm’s proposal did not meet anti-fraud and investor protection standards. Grayscale argued that because the SEC had previously approved certain surveillance agreements to prevent fraud in Bitcoin futures-based ETFs, the same safeguards should suffice for Grayscale’s spot fund.

Naturally, Grayscale and other advocates for the crypto industry cheered the court’s decision, which could prompt the SEC to curb plans to deny current and future applications from other companies looking to create Bitcoin ETFs. Grayscale called the ruling a “monumental step forward for American investors, the Bitcoin ecosystem, and all those who have been advocating for Bitcoin exposure through the added protections of the ETF wrapper.”

The celebration may be short lived, though, as members of Congress are beginning the process of writing crypto-specific laws. The action comes amid clamoring for clearer regulation from investors who suffered losses in the collapse of high-profile crypto firms like FTX and Genesis Global Capital. Would-be reformers such as Sen. Elizabeth Warren, D-Massachusetts, are not mincing words about the dangers they perceive in an unregulated crypto market. “Crypto has become the payment method of choice for rogue nations, drug lords, ransomware gangs, and fraudsters to launder billions of dollars in stolen funds, evade sanctions, fund illegal weapons programs, and profit off of devastating cyberattacks,” she said in July.

Efforts to codify federal oversight of digital assets seemed to have no traction on Capitol Hill until this summer. Prior to Congress’ August break, the House Financial Services Committee approved two industry-supported bills would provide a framework for crypto regulation, clarify whether cryptocurrencies are commodities or securities, and address the status of so-called stablecoins tied to more conventional assets. On the other side of the Capitol,  the Senate approved a defense funding bill that included amendments intended to strengthen enforcement in the crypto sector. The legislation would authorize the Treasury Department to establish standards to prevent cryptocurrencies from being used to finance illicit activities. Additionally, it calls for a study on deterring anonymous crypto transactions.

It says something about the roadblocks in the way when building consensus in the legislative branch offers arguably the straightest path forward for crypto regulation. Yet, it’s possible that so many twists and turns may lead to even more robust law regarding digital assets. Wherever the process ends up, it will probably beat the confusion now reigning around crypto investment.