The Securities and Exchange Commission's approach to regulating the crypto industry took another blow on Tuesday in a court case that could prove to be a key milestone in the ongoing fusion of bitcoin and traditional asset management. A federal appeals court struck down the SEC's order denying the conversion of the Grayscale Bitcoin Trust (GBTC) into an exchange traded fund. Specifically, the ruling swatted down the regulator's argument that the spot and futures markets for bitcoin were separate enough to justify holding off direct crypto ETFs even though futures products have already launched. "The Commission's unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decisionmaking," the ruling said. The decision, if it is upheld, could help dictate what happens next across the asset management industry as it relates to crypto. "It is a certainly a resounding victory for Grayscale, and the court rejected the basis that the SEC has used for years," said Jeremy Senderowicz, shareholder at law firm Vedder Price. The decision does not guarantee that investors will be able to freely trade a bitcoin ETF anytime soon, however. Here are the key questions remaining after the ruling. Legal options The next step in the case will be up to the SEC. The regulator has the option to appeal the ruling to the full roster of Court of Appeals as opposed to the three-person panel that delivered Tuesday's ruling, according to Senderowicz. The case could eventually reach the U.S. Supreme Court, he said. An SEC spokesperson told CNBC that the commission is reviewing the decision to determine next steps. "The timing is still very uncertain, but unless the SEC can win an appeal of this case it will probably be difficult for them to avoid allowing spot bitcoin ETFs to launch," Senderowicz said. Technically, the ruling itself does not force the SEC to approve a spot bitcoin fund even if the regulator chooses not to appeal Tuesday's ruling. The commission could try to take a different approach to blocking an ETF. "The key part is where the judge basically said the SEC has to go back and use different reasoning," said Terrence Yang, managing director at Swan Bitcoin. Yang pointed to a line in the ruling that said "we will not substitute our policy judgments for that of the agency" as a sign that the SEC could try again to block bitcoin ETFs. One potential avenue would be for the SEC to re-examine the futures products, as well. However, that appears unlikely, Senderowicz said, given the SEC's recent approach to crypto futures products, including allowing the launch of the leveraged Volatility Shares 2x Bitcoin Strategy ETF (BITX) in June . "I don't think that there's been any signs that that's where the SEC is going," he said. In the pipeline The SEC's decision on the next step in the Grayscale case will be watched closely by other asset management firms that have active applications for their own spot bitcoin ETF. Outside of Grayscale, the oldest active application is for the Ark 21Shares Bitcoin ETF. The rule change proposal for that fund was refiled in April after the SEC rejected a previous attempt, just as it has dozens of other applications in recent years. ETF giant BlackRock filed in June for its own bitcoin ETF under the iShares brand, and a flurry of similar applications from rival asset managers soon followed. The SEC delayed its decision on the Ark 21Shares Bitcoin ETF on Aug. 11. Ark Invest founder Cathie Wood told Bloomberg News earlier this month that she expected the SEC would approve multiple funds at roughly the same time. If the SEC does try to approve multiple products at once, then the other applicants may be stuck waiting for the Grayscale situation to resolve. "It's unclear whether they would approve something for Grayscale on a short timeline, based on the existing record, or if they'd say 'all right, we'll have to approve this, but you Grayscale have to restart the process," Senderowicz said. The exact timeline of approval could be key for determining which of the new funds gain favor with investors, especially considering that the Grayscale Bitcoin Trust already has $16 billion in assets under management. "There's going to be a first-mover advantage for Grayscale, even if they do approve some of these spot bitcoin products simultaneously," said Roxanna Islam, associate director of research at ETF data firm VettaFi. The SEC has the ability to push its decision on all of the active filings into next year. "I think it's a 2024 story," Islam said. Ark Invest did not respond to a request for comment on Tuesday. BlackRock declined to comment. Broader impact One immediate reaction to Tuesday's ruling was a rally for crypto and crypto-linked stocks. Shares of Coinbase and bitcoin miner Marathon Digital surged about 15% and 29%, respectively. The price of bitcoin jumped more than 7%. However, that excitement could die down if the process drags into next year. "It's bullish for the bitcoin price short term, but it will be short-lived once again," Yang said. Another impact could be for the bitcoin futures ETFs that are already on the market, led by the $940 million ProShares Bitcoin Strategy ETF (BITO) . Those funds could see outflows if investors choose the spot bitcoin products instead. One option for the asset management firms is to change their futures ETF offerings. Consider Valkyrie's attempt to change its bitcoin futures product into a broader crypto fund that also holds ether futures. "Typically, when a spot ETF product enters the market, there definitely is less demand for futures ETFs products. There are certain cases where an investor might choose a futures product, and that's ... in a mixed strategy or if they're looking for something that is inversed or leveraged," Islam said.
