Summer 2022 was the season the crypto industry suffered its greatest self-inflicted wounds. The industry’s fate this summer will be up to the courts.
This past week was the latest reminder, as the Securities and Exchange Commission pushed back against an attempt by crypto platform
Coinbase Global
(ticker: COIN) to force it to write new crypto rules and other courts gave signs that they may be nearing decisions that will be pivotal for the industry.
The first case concerns the
Grayscale Bitcoin Trust
(ticker: GBTC), which is the largest publicly traded Bitcoin fund with $16.9 billion under management. The trust trades like a closed-end fund, meaning its share price can deviate widely from the value of the Bitcoin it holds. On Tuesday, GBTC traded at a 40% discount.
Grayscale Investments wants to convert GBTC into an exchange-traded fund, which would make that discount go away, but the SEC has blocked its application and those of similar funds, arguing that there’s not enough market surveillance on crypto exchanges to prevent fraud and manipulation, among other issues. Grayscale sued, and at a hearing on March 7, judges seemed skeptical of the SEC’s arguments as to why GBTC should be treated differently than Bitcoin futures exchange-traded products, which the SEC has approved.
On Tuesday this week, the same court that heard the Grayscale case issued an opinion on another case that was heard on March 7. If GBTC’s timeline is similar, a decision could be imminent.
A Grayscale spokesperson didn’t immediately have comment.
The second case involves blockchain firm Ripple and its token XRP. In December 2020, the SEC sued Ripple and two executives, alleging that they conducted a $1.3 billion registered securities offering. Ripple and the SEC briefed the court on summary judgment motions late last year, and court watchers expect that the judge in the case could issue a decision any day. This week, the judge ruled against the SEC’s bid to seal some documents in the case.
A ruling in that case could determine whether XRP should be regulated as a security, which would have wide implications for thousands of similar tokens that SEC Chair Gary Gensler has said likely fall under his remit.
If the court decided XRP is a security, it could mean exchanges such as Coinbase have to delist similar tokens, cutting significantly into profits. A ruling that decided XRP doesn’t fall under securities laws on the other hand, would be a huge boon to crypto firms.
Ripple has also argued that it didn’t receive “fair notice” from the SEC that it was violating the law. A win on that basis would have more limited implications for the crypto industry since it could leave as an open question what laws crypto token issuers have to follow.
A Ripple spokesperson didn’t immediately respond to a request for comment.
Finally, the SEC and Coinbase are amping up their own battle. The SEC in March warned Coinbase that it is likely to sue it for violating the law. Late last month, Coinbase formally responded, denying that it offers securities on its platform.
Simultaneously, Coinbase and the SEC are fighting in court over whether the agency has taken too long to respond to the company’s formal request that it write new rules on how crypto assets should be treated, an allegation that the SEC denied this week.
“Investors should be focusing on whether the company would have the ability to successfully pivot its business model and geographic focus if it were forced to curtail or cease a large portion of its activities in the U.S. as a result of an SEC enforcement action,” wrote Berenberg Capital Markets analyst Mark Palmer in a research note on Monday. The firm has a “Hold” rating on Coinbase.
Coinbase declined to comment. On the company’s earnings call earlier this month, Chief Financial Officer Alesia Haas called the SEC’s notice “meaningful” but said the company was diversifying its revenues and felt confident it could deliver on its objectives in any scenario.
An SEC spokesperson declined to comment.
Taken together, the three court battles will likely be the biggest catalysts or setbacks for crypto this year. Buckle up.
Write to Joe Light at joe.light@barrons.com
Read the full article here
