By Brett Munster, Director of Research at Onramp
Welcome back to The Node Ahead, a cryptocurrency and digital asset resource for financial advisors. Every other week, we discuss the latest crypto news and the potential impacts it may have on you and your clients.
In this edition, we’ll cover the following:
- The SEC loses against Grayscale
- Crypto Adoption in Turkey
- Visa supports stablecoins
Grayscale defeats the SEC
Back in July 2022, we covered the history of GBTC and why Grayscale decided to sue the SEC. As a quick recap, Grayscale runs the GBTC Trust, which is the largest public holder of bitcoin with over 600,000 BTC. Once bitcoin ETFs started to emerge in jurisdictions outside the US, GBTC went from trading at a premium to trading at a discount. As a result, Grayscale filed to convert GBTC from a trust structure into an ETF in order to have its shares trade closer to bitcoin’s value. However, the SEC denied their application just as it has denied every other ETF application since 2013. In response, Grayscale sued the SEC, arguing the decision to reject the conversion to an ETF was “arbitrary,” given the regulator’s prior approval of a futures-based bitcoin ETF back in 2021.
In March of this year, the two sides gave their oral arguments, which we wrote about at the time. During those hearings, the SEC’s defense seemed unable to provide satisfactory answers to the Judges’ comments and questions. We predicted at the time it was likely that Grayscale would win the case, and on August 29th, that’s exactly what happened.
A U.S. court of appeals found the SEC’s reason for denying Grayscale’s Bitcoin spot ETF application was not reasonable. In fact, all three judges unanimously ruled 3-0 against the SEC. The court criticized the SEC’s inconsistent treatment of spot and futures-based bitcoin ETFs, saying the “denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products.” According to the verdict, the SEC fell “short of the standard” needed to deny the application, its rationale was “incoherent,” and the SEC “failed to adequately explain” its argument. That is about as unequivocal of rejection as we have ever seen from the courts toward a federal regulator. Basically, the judges validated all the complaints those in the crypto industry have had regarding the SEC’s behavior over the past several years.
Now that Grayscale has won its case against the SEC, where do we go from here? Three things to keep in mind.
First, just because Grayscale won doesn’t mean GBTC automatically becomes an ETF. The judges granted Grayscale’s petition for review, meaning the SEC will have 45 days to review Grayscale’s ETF application again. Although the judges ruled that the original rationale for denial was “arbitrary and capricious,” there is nothing stopping the SEC from denying GBTC again using a completely different reason. The SEC could decide to approve the conversion of GBTC into an ETF, but it’s also possible that the SEC will simply use alternative arguments to justify rejecting Grayscale’s application again. However, if the SEC were to take the latter route, coming up with a new excuse may further undermine the agency’s credibility as well as lead to more lawsuits that the SEC could very well lose again.
Second, this case has major implications for all future ETF applications, including the ones recently filed by Ark, Blackrock, and others. The SEC’s main reason for denying bitcoin spot ETF proposals over the past few years has been the argument that fraud and manipulation could affect spot and regulated futures markets differently. However, the court just struck down that rationale as the SEC could not provide any evidence of this. In fact, Grayscale presented data showing that there’s a 99.9% correlation between the two markets. Thus, the SEC can no longer deny an ETF application on the grounds of fraud and manipulation concerns. Simply put, Grayscale’s victory makes it harder for the SEC to deny future spot bitcoin ETFs.
Furthermore, knowing all the objections they have used in the past have been either proven false or overturned by courts, it is possible the SEC will use this decision as an opportunity to save face and back away from its anti-ETF position. Gensler might very well use some version of “we disagree, but we have to respect the court’s decision” as a convenient excuse to back out of a losing battle.
The odds of having a bitcoin ETF approved later this year or in the first half of next year significantly increased with this ruling. It’s also possible that the ETF opportunity doesn’t stop at bitcoin but could open the doors for ETH and other cryptoassets as well. Should an ETF be approved, it would instantly lower the barrier to entry for a large number of people who would prefer to invest in crypto through a more traditional instrument. There are potentially billions of dollars of capital sitting on the sidelines that may find its way into crypto if it could be bought and sold via an ETF.Third, the SEC is racking up losses faster than the 2017 Cleveland Browns. The SEC has now lost both its crypto cases against Ripple and Grayscale. The judge ruled in Coinbase’s favor in its lawsuit against the SEC, and odds are the SEC will lose its lawsuit against Coinbase too. Gensler has gone to considerable lengths to make his views seem like obvious, common-sense applications of law. But both the Ripple case and the Grayscale case have struck down the legal basis the SEC has used to justify its actions and highlighted the agency’s broad overreach. As the Wall Street Journal noted in a scathing editorial on the Grayscale decision, it’s become clear that Gensler grossly overstepped his power. “Mr. Gensler is holding bitcoin spot ETFs hostage in his crypto market power grab. Arbitrary regulation and regulatory overreaches are recurring themes of the Gensler SEC.” These court cases continue to undermine the SEC’s self-appointed jurisdiction over the crypto industry.
Crypto Adoption in Turkey
In the U.S., bitcoin is often viewed as a speculative financial asset similar to stocks. That’s largely because the dollar is the world reserve currency, payment processing in the U.S. works pretty well (at least for end consumers), most adults (95.5% according to the FDIC) in the U.S. have access to bank accounts and a strong rule of law has resulted in relatively few people ever having their accounts unlawfully frozen. Thus, most U.S. citizens do not immediately recognize the inherent value of a currency that can be self-custodied and whose monetary policy is transparent, predictable, cannot be changed, and cannot be debased. They only view bitcoin in terms of price appreciation.
However, that is a luxury most people in the world do not have. Only 13% of the world’s population lives in geographies that operate on the most stable currencies, such as the dollar, euro, yen, pound, Australian dollar, Canadian dollar, or Swiss Franc. The other 87% who are born into considerably less trustworthy financial systems are increasingly turning to bitcoin as an economic lifeline due to its inherent characteristics, not for financial speculation.
Countries like Lebanon and Cyprus have been plagued with high-interest rates, depreciating currencies, and corrupt financial systems. As a result, citizens in these countries are increasingly using bitcoin and stablecoins to preserve their wealth and transact with each other. Hyperinflation in countries such as Argentina, Venezuela, Nigeria, and many others has led to massive growth of bitcoin adoption. Even larger economies, such as Japan and Brazil, whose currencies have been steadily depreciating and where inflation is growing modestly, are seeing a significant uptick in bitcoin ownership and use.
But the current poster child for bitcoin adoption right now might be Turkey. Despite being a G20 country with over 85 million citizens, the nation’s currency, the Lira, has lost roughly 50% of its value against the dollar since the start of the year. Turkey also raised its interest rates to 25% to try to curb inflation, which has grown to 59%. No surprise, Turkey has witnessed a notable surge in bitcoin and crypto adoption.
According to a recent survey, over half the population (52%) owns cryptoassets, which is up 12% over the past 18 months. The survey revealed the rising number and percentage of cryptoasset investors in Turkey points to an acceptance of crypto as a hedge against inflation. It’s no surprise then that bitcoin, due to its monetary policy, remains the most prominent cryptoasset in Turkey (BTC is owned by 71% of all crypto investors in the country).
In addition to inflation concerns, 34% of participants use crypto for peer-to-peer money transfers and cross-border remittances as it’s faster than traditional payment methods. Additionally, roughly 8% of the respondents said they used crypto to send donations to non-profit organizations, demonstrating a rise in the use of crypto for philanthropic purposes and its potential to make a positive impact in the world.
Another interesting trend this study revealed has to do with demographics. In the U.S., crypto investors skew younger and are more likely to be male. However, in Turkey, there is a rising trend of women’s participation, particularly among the younger generation. Almost half (47%) of crypto investors aged between 18 and 30 are female, indicating a decrease in the gender gap as crypto adoption becomes more widespread.
It’s important to remember crypto is a global phenomenon, and the reasons for adoption and use vary from region to region. The majority of crypto users throughout the world own crypto for reasons that have nothing to do with financial speculation. That’s why there will always be a base level of demand for bitcoin regardless of its price. But even if you are into bitcoin only for the financial returns, it’s worth understanding this phenomenon because that base level of demand continues to grow every year, but the supply of bitcoin does not.
Visa supports stablecoins
Last newsletter, we highlighted PayPal’s announcement that it plans to launch its own stablecoin. We theorized one motivation behind PayPal’s move was that a stablecoin would lower transaction costs for PayPal by avoiding credit card fees from the likes of Visa and Mastercard. Well, it looks as though Visa isn’t just waiting around to let stablecoins undercut its business.
Last week Visa announced that merchants can now settle payments in USDC stablecoins via the Solana and Ethereum networks. This will allow merchants to settle payments nearly instantly (cross-border settlements can often take days), thereby eliminating any settlement risk. It’s also a cheaper method of moving money between banks because it costs less to move money over blockchains than traditional financial rails. Visa has already completed a few successful pilots and has transferred millions of dollars worth of USDC over the Solana and Ethereum networks.
According to Visa, the company enables the clearing, settlement, and movement of billions of dollars a day across 25 currencies between roughly 15,000 financial institutions. Adding USDC settlement options on Solana and Ethereum, which is faster and cheaper, paves the way for stablecoins to become the de facto interbank settlement solution for credit card networks and banks. Ultimately, we are talking about replacing ACH and bank wires with blockchains and tokens, which makes Visa’s announcement one of the biggest stories in the crypto industry thus far in 2023.
In addition to Visa, over the last few months, we’ve seen giants like Shopify and PayPal turn to crypto and start implementing stablecoin payments. It’s early, but we are starting to see more and more evidence of the traditional financial system being enhanced by blockchain technology.
In Other News
President Joe Biden’s administration has proposed a new crypto tax reporting rule that requires crypto brokers, including exchanges and payment processors, to report information on their users’ digital asset sales and transactions to the IRS.
The market for tokenized U.S. Treasuries has grown nearly sixfold to $622 million this year as real-world assets on blockchains keep expanding.
Grayscale’s victory against the SEC clears a path for spot bitcoin ETFs.
A New York judge dismissed a class action lawsuit against Uniswap, the largest DeFi exchange, and also called ETH a commodity.
SEC Chair Gary Gensler to testify before Congress twice this September.
Tokenization of Real World Assets (RWA) could represent a trillion-dollar opportunity.
Colorado’s DMV has started accepting payments through crypto for residents who want to renew their driver’s license or vehicle registration.
Real regulations are coming to the crypto industry.
The London Stock Exchange Group has drawn up plans to offer blockchain-based versions of traditional financial assets.New US accounting standard for crypto to be finalized by year-end.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely my own and do not express the views or opinions of Blockforce Capital or Onramp Invest.