Legislation or litigation? The spot bitcoin ETF debate moves forward

The ongoing legal battle to bring a spot bitcoin ETF to market in the US comes at a potential turning point for the token itself, which recently passed $30,000 and fueled speculation of another crypto boom this year.

After Grayscale’s proposal to bring its bitcoin-holding exchange-traded fund to the US market was rejected last June, the firm sued the US Securities and Exchange Commission. Oral arguments began last month in the District of Columbia Court of Appeals.

“I think the chances are more than 50-50 that [Grayscale] will prevail in this lawsuit,” Dave Nadig, financial futurist at VettaFi, told Bob Pisani on CNBC’s “ETF Edge” on Monday.

“But I don’t think that means we’re suddenly going to get a bitcoin ETF,” he added. “I think it’s actually more likely that means they’re closing some of the futures-based products.”

SEC Chairman Gary Gensler has argued that bitcoin futures are a regulated product while spot-based is not, but Grayscale argues that the proposed fund is closely related to the futures fund, which already meets anti-fraud standards.

“I suspect that even if Grayscale wins, Gensler is going to back away from crypto even further,” Nadig said. “Put some restrictions around the futures based products while we wait for comprehensive crypto regulation and legislation one day.”

Following the collapse of FTX, Gensler and the SEC have increased enforcement of crypto-related offerings and companies. Critics say “regulation by enforcement“is excessive.

After a turbulent 2022 for cryptocurrencies and their trading platforms, Bitcoin has rallied more than 77% this year, and the ProShares Bitcoin Strategy ETF (BITO) is up 67% as of Wednesday. But without a clear understanding of whether tokens should be classified as commodities or securities, crypto products remain at a crossroads.

“The bottom line is we need legislation,” Nadig said. “This will not be solved with the stroke of a pen at the SEC desk, we need Congress to act.”

Nadig noted that Congress has drafted a bill to provide a regulatory framework for stablecoins, which are cryptocurrency tokens that aim to mirror the value of more traditional assets.

“Stablecoins are basically money market funds that you use for payments on crypto rails,” he said. “A good set of legislation is on the table to basically bring them under the umbrella [and] get them regulated by the Fed.”

Nadig is optimistic that congressional attention will help shift the regulatory debate toward establishing a framework that more comprehensively classifies cryptocurrencies and the ETFs that track them.

“Having two regulators arguing about it is the wrong way to solve this problem,” he said. “I think we need to have legislation that recognizes that digital assets are different and need different sets of rules.”