Unsurprisingly, the U.S. Securities and Exchange Commission (SEC) has postponed decisions on the Hashdex and Grayscale ETF filings until next year. However, Hashdex's unique application and Grayscale's strategic approach might eventually force Gensler and the SEC into a corner.

New year, new frontier

The regulator announced the postponement of applications by Brazilian asset manager Hashdex and Grayscale Investments on Wednesday. Hashdex seeks to convert its bitcoin futures ETF (DEFI) into a spot bitcoin ETF, while Grayscale has applis for an ether futures ETF. The initial deadline for both decisions was November 17, but the SEC has now put this back until January 1, 2024.

This decision comes amid growing anticipation for the federal regulator's approval of a spot bitcoin ETF. The SEC has repeatedly deferred decisions on crypto-related ETFs, citing concerns over potential market manipulation and the absence of surveillance-sharing agreements (SSA).

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A Surveillance-Sharing Agreement (SSA) facilitates data exchange about market transactions, clearing processes, and customer identities. This agreement primarily aims to minimize the risk of market manipulation. It is particularly significant in regulating crypto-based ETFs, ensuring transparency and oversight in trading, which is crucial for regulatory bodies like the SEC.

Over a dozen companies have submitted applications for spot bitcoin ETFs over the course of 2023, and several others for ETH-related products. The SEC has not provided clear indications of its stance on these new applications, despite some applicants arguing that concerns over market manipulation have been resolved, especially following the approval of Bitcoin futures ETFs.

Hashdex in prime position

Hashdex's application stands out among the twelve contenders for SEC approval, notably for its unique approach of buying physical bitcoin from the Chicago Mercantile Exchange (CME) and solely using CME pricing.

This marks a strategic shift from their existing Hashdex Bitcoin Futures ETF. Their approach, focusing on an SSA with CME rather than Coinbase, aims to reduce market manipulation concerns. Analysts like Bloomberg Intelligence's James Seyffart suggest this method, involving exchanging futures for spot exposure, might corner the SEC into approval. He says Hashdex's application is poised for approval, even if all other applicants get rejected.

Other experts, including Nate Geraci and Eric Balchunas, also view Hashdex's tactic favorably, considering it clever and potentially hard for the SEC to reject. Hashdex has modified its application to address SEC concerns, offering an SEC-approved path for transitioning from a futures to a spot product.

SEC feels the squeeze

At the end of August, the U.S. Court of Appeals ruled against the SEC, finding its outright rejection of Grayscale's application to convert GBTC, which is a similar vehicle to Bitcoin futures ETFs, into a spot Bitcoin ETF as "arbitrary and capricious."

This decision further highlighted the regulator's inconsistency in treating similar financial products. The SEC did not appeal the court ruling, boosting the community's hopes for an end to its fight on everything crypto.

Grayscale's proposed spot BTC ETF would enable investors to deal with Bitcoin without owning the cryptocurrency directly. The asset manager argued that since the SEC had previously approved bitcoin futures-based ETFs, its spot ETF should be treated similarly, as both funds are based on Bitcoin's price.

Now, it seems Grayscale has employed a strategic approach by applying for an ether futures ETF via the 19b-4 form. Seyffart has suggested on X that Grayscale's application could be a "trojan horse" aimed at cornering the SEC into a lose-lose position.

Grayscale's choice to file their Ether futures ETF through a 19b-4 form, a route not typically taken for such products, is perceived as deliberate.

If the SEC approves Grayscale's ether futures ETF application, it would give Grayscale an advantage in pushing for the later approval of its spot ether ETF. Otherwise, Grayscale could argue that the SEC inconsistently treats bitcoin and ether futures ETFs, which Seyffart believes, puts the SEC in a lose-lose situation.

"All current Eth futures ETFs were not approved under this process and we have no SEC decision process to fall back on if the SEC denies spot ETH ETFs in 2024. A 19b-4 futures ETF approval letter would set things up for another battle in court that would likely be a virtual replay to $GBTC's case." @JSeyff

Scott Johnsson, General President at Van Buren Capital, said on Thursday that any SEC decision will probably be announced on the last possible day, based on last year's futures-based BTC ETFs approval timeline.

At the beginning of the month, Seyffart and Balchunas said they predict a high chance, around 90%, of ETF approval by January 10. They also shared that they anticipate that the SEC might resolve as many as nine out of the twelve applications before this date.

Cathie Wood, CEO of ARK Invest, spoke on CNBC about the potential effects of a U.S. bitcoin ETF approval on the crypto market, especially regarding Grayscale's GBTC. She said introducing a Bitcoin ETF in the U.S. could significantly impact market dynamics, challenging GBTC's market position. Traditionally, GBTC has been a major route for institutional Bitcoin exposure, but a new ETF would offer a competitive alternative.

JPMorgan has suggested that spot Bitcoin ETFs might not draw significant new investments but rather redistribute existing capital among different ETFs. They also advise caution regarding a more lenient regulatory environment, given the current state of the crypto market and increased regulatory actions.

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