The Breakdown - SEC Doesn't Appeal Grayscale Decision: What It Means

Episode Date: October 16, 2023

Today NLW catches up on the latest crypto news, including: The SEC decides not to appeal Grayscale decision Fake news Bitcoin Spot ETF California's Bitlicense - and more Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, October 16th, and today we are discussing the SEC deciding not to appeal the grayscale decision. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes. bit.ly slash breakdown pod. Hello friends, happy Monday. Quite a Monday it was as well.

This morning everyone was treated to a surprise when a coin telegraph tweet blared that BlackRock had been approved for a Bitcoin spot ETF. Now, in spite of the Bloomberg ETF analyst desperately responding asking for sourcing, hundreds of cloud chasing accounts retweeted the thing or shared it in their own version, trying, of course, to capture that breaking news magic on Twitter slash X. Alongside all of these updates, again, all unsourced, Bitcoin ripped all the way up to $30,000. Around 72 million in short positions was liquidated along the way, but then Fox reported that BlackRock had officially denied the approval, and Bitcoin came plummeting back down the other

direction. Now, it is still trading above 28K, which is up about 5% from yesterday, which was itself a slightly Green Day, but still, on the way back down, another 31 million in longs was also liquidated. So you're talking about $100 million of value evaporated in just a few short minutes. There are so many interpretations of this, and probably many that we'll be talking about throughout the week. First, how bad the incentives are on X slash Twitter, where you're rewarded for being the fastest to breaking news, even when it's not real news. Second, how hungry the market is for any movement one way or another. We've talked a lot about how. we're in this long, slow, sloggy period between the bull market and the bear market,

and that's a time that can translate into particular volatility because everyone's waiting for the next big shoe to drop. Third, we kind of got a preview of how the market might react to an announcement when it happens. Now, of course, it'll matter a lot more where the Bitcoin price ends up than what it does immediately in the first few minutes after an ETF is approved, because to some extent it's inevitable that there is going to be a race in to front-run any particular movement, even if it doesn't actually impact the price all that much when push comes to shove. Still, the velocity of the move up was notable, and again, seems like a little bit of a preview about what we might be in for. But maybe the most important implication of this is that there's a fairly

decent argument that this actually makes an approval less likely. One of the SEC's big complaints is that this market is too easily manipulated. Seeing the price go up that fast and then come back down again that quickly liquidating $100 million in positions along the way is exactly the sort of thing that the SEC doesn't want to see. Now, Coin Telegraph for their part have said, we apologize for a tweet that led to the dissemination of inaccurate information regarding the BlackRock Bitcoin ETF. An internal investigation is currently underway. We are committed to transparency and we'll share the findings of the investigation with the public once it is concluded within three hours. That was a little over three hours ago and still nothing yet. Adam Cochran added,

I look forward to them providing documentation on where that report came from, because they just massively hurt the chances of a real ETF approval and or blatantly scammed people. So to sum up, hello Monday, hello drama. Now, there was some real SEC news, and that'll actually be what kicks off a day where our main focus is to try to sum up a bunch of smaller stories that have all converged over the past few days. The first of those is that at midnight on Friday, the deadline passed for the SEC to appeal the Grayscale Court Order.

This means the regulator will now be required to reconsider the application to convert the Grayscale Bitcoin Trust into an ETF. The lawsuit, which was decided in August, found that the SEC's original reasoning for denying the conversion had been, quote, arbitrary and capricious. The court ruled that the SEC had treated the Grayscale product differently to futures-based Bitcoin ETFs, which had been approved in 2021. The order stated that, quote, the Securities and Exchange Commission recently approved the trading of two Bitcoin futures funds on national exchanges, but denied approval of Grayscale's Bitcoin fund. The court said that federal agencies are required to, quote, treat like cases alike, Although the Grayscale application will now be returned to the SEC for a new decision,

it's not clear that this will result in an approval. It's still open for the SEC to refuse to grant the conversion to an ETF on new grounds which had not been covered in the original decision. The timeline for that new decision is also unclear. The court is expected to give further directions on that matter this week now that the opportunity to appeal has lapsed. In a statement, Grayscale explained what they know about what will happen next, saying that, the federal rules of appellate procedure's 45-day period to secret hearing has now passed. The court will now issue its final mandate within seven calendar days. The Grayscale team remains operationally ready to convert GBT to an ETF upon the SEC's

approval, and we look forward to sharing more information as soon as practicable. Now, despite the remaining uncertainty, markets seem hopeful. The GBT discount has substantially narrowed in recent days to 16%, which is the smallest margin since November 2021. At its lowest point during Q1 of this year, the GBT's, discount had ballooned out to more than 48%. Now, there were a fairly wide array of interpretations of this. Satoshi Flipper tweeted, SEC not filing the gray scale appeal was probably the most bullish event this year. In my opinion, it's even more bullish than an actual approval. By not

appealing the court decision to reverse the application denial, eventually there must be an approval. Y'all will come to your senses soon and Bitcoin will be over 30k. James Seafart from Bloomberg says, the SEC could attempt to deny on new grounds. It would be a very difficult needle to thread, and we view it as unlikely. They can always find ways to keep delaying, though. Now, on the Skeptics Corner, Roe Ryder tweets, this doesn't mean anything other than the SEC can come up with a new reason for denial or delay. They're not any closer to actual approval. After the total failure of the ETH futures launches, it's become clearer that the amount of institutional interest in crypto has been dramatically overhyped. DCG is caught up in

multiple legal battles that make approval of Grayscale even less likely. If Grayscale is approved, mass redemptions from GBT locked for a decade could lead to a huge sell-off. Kind of the laundry list there of reasons to be skeptical or fud this news. Still, I would say that I kind of am most connected to the mid-range cynical interpretation, which comes from Nap Jenner, who said, imagine thinking they would appeal instead of just coming up with a new reason. Now, look, overall, indications do point to the SEC getting more rather than less likely to approve.

In particular, we talked last week about the updated ETF filings from ARC, and after that in Vesco, which seem to be answering specific SEC questions. The interpretation has been that the SEC is positively engaging rather than just stonewalling, which is in and of itself a change of course. At the same time, I still think it's kind of hard to imagine that the SEC is going to somehow reverse course all of a sudden, and it seems more likely that they're going to use every tool that they have to just delay this as long as humanly possible. But then again, that could just be me being over cynical. Today's episode is brought to you by Cracken.

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Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, DBA, DBA, Cracken. Now, moving to regulation but in a different sphere, California Governor Gavin Newsom has signed into law a new licensing and regulatory regime for crypto firms that some are calling that state's bit license.

Called the digital financial assets law, the legislation primarily requires firms to seek licensing from the Department of Financial Protection and Innovation, or DFPI, to engage in digital asset business activities. The licensing regime will commence in July of 2025, and it's expected to have similar requirements and limitations to that New York State Bit License once it comes into force. Now, this is the second time the legislation has found its way onto the governor's desk. In September of last year, Newsom vetoed the bill, calling it premature and costly. He insisted that state lawmakers should wait for federal regulations to be decided to ensure

compatibility across jurisdictions. Now, of course, a lot has changed in the last 12 months, both in the crypto industry and the congressional landscape around crypto regulations. This time around, Newsom signed off on the legislation with some caveats. In a communication with the state legislature, Newsom said, Ambiguity of certain terms in the scope of this bill will require further refinement in both the regulatory process and in statute to provide further clarity. He added that, quote,

It is essential that we strike the appropriate balance between protecting consumers from harm and fostering a responsible innovation environment. Among other requirements, the new legislation will allow the DFPI to impose stringent audit requirements on cryptoforms, forcing them to keep records for five years. Now, the big concern that many people have is around its impact for DFPA. defy. Delphi Digital General Counsel Gabriel Shapiro says, bad bill, likely impossible to comply with except for centralized exchanges. The bill requires everyone engaged in digital financial asset business activity to obtain a license, which can even cover video game providers and traders.

Bit license on steroids. Now, the positive spin that I've seen from a number of YouTubers is summed up by Pushpendra Singh, who writes, Big News, California Governor Newsom approved a crypto regulation bill. Crypto adoption is increasing day by day. So obviously that idea is that, get regulation on the books makes more businesses able to engage with crypto positively. But, given that you could have said the same thing about the bit license, and given the freezing effect that that has had on New York crypto, it's probably worth being at least a little skeptical of that interpretation. To the extent that you want to take something positive away, is that Governor Newsom is pointing out that there are some significant areas of ambiguity here

when it comes to how the specific regulations are written. And a lot of how onerous and burdensome this is might be impacted by the way that those final rules are written up. Moving over to the macro side of things for a moment. Of course, ever since Hamas' attack on Israel, we've been following the economic implications of that, and specifically the economic implications of a potentially widening conflict. Now, the uncertainty surrounding escalation in the Middle East has continued to weigh on oil markets. As Israel ramps up plans for retaliation, the U.S. State Department has rushed to try to contain the conflict. Backchannel talks have reportedly been conducted with Iran, and Secretary of State Anthony Blinken was scheduled to land in Israel on Monday.

President Biden is also considering a trip to Israel later this week, and meanwhile, the largest U.S. aircraft carrier group is now stationed in the Mediterranean Sea off the coast of Israel. Crude oil has traded steadily higher as the risk of supply constraints gets priced in. Friday's session saw Brent Crude, which is the International Benchmark contract, surged by 6% to reach a month-long high of $91. Oil prices are still below the September high of $95 per barrel, but the risk of a price spike is now clear. Friday's catalyst seemed to be evacuation warnings from Israel in anticipation of troops

entering Gaza. Now, given that Israel has no globally significant oil production capacity, speculation surrounds whether Iran will be dragged into the broader conflict. Both the U.S. and Israel have claimed that Iran played no role in funding or assisting with last weekend's attack, but that hasn't stopped some U.S. lawmakers from calling for retaliation against them. Earlier in the week, Lindsay Graham had advocated for the U.S. to bomb Iran, regardless of whether or not they were directly implicated in the attacks. On Sunday, he said he would introduce a Senate resolution to, quote, allow military action by the United States in conjunction with Israel to knock Iran out of the oil business. Now, when it comes to how much markets are anticipating

an escalation, it seems like they're not quite ready to assume that the war will get much bigger. Investment strategists at Sander Chartered said, historically, Middle East conflicts have rarely translated to a sustained rise in oil prices when they have not disrupted supply. They said in this case, quote, there is a low risk of both direct and indirect supply disruptions. Now, Blinkin's visit to Israel comes off the back of meetings with Arab officials, including OPEC leader Saudi Arabia. The Secretary of State is presumably attempting to guarantee continued oil supply in the face of escalating conflict alongside attempts to de-escalate the situation. Commentators have noted that a significant oil price shock would likely be enough to plunge most of the

world, including the U.S. into recession. For now, though, it seems that oil prices are calming somewhat, perhaps indicating that the chances of runaway escalation are slim. Brent Crude traded down 0.4% during the Monday morning session. Still, the Kobay-easy letter made the connection to the continued fight against inflation clear. They write, just as crude oil prices were finally coming down, geopolitical tensions are sending them higher. In an already undersupplied market, we are seeing even more supply at risk, all as the U.S. Strategic Petroleum Reserve stand at their lowest level since 1983.

The fight against inflation is far from over. So, friends, lots of interesting dynamics to start the week. Coming up either tomorrow or the day after, I will do an SBF trial update. We had Zach Prince from Blockfly testify last week, NFTX's head of engineering, and one of the folks who has already pled guilty Nasjad Singh is on the witness stand today. I hope that you are starting what will be an inevitably wonderful week. And hey, I want to give one more big shout out to my sponsor, Cracken, for the launch of their new campaign, see what crypto can be. Go to crackin.com slash the breakdown to learn more, and until next time, be safe and take care of each other. Peace.