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Bitcoin rallies after Grayscale court victory

Bitcoin rallies after Grayscale court victory

On Tuesday, crypto asset manager Grayscale notched a key legal victory over the SEC. [Tingey Injury Law Firm via Unsplash]

There’s never a dull moment on the blockchain. Here’s what you need to know this week:

Grayscale secured a legal victory over the SEC. What the court ruling could mean for the future of spot bitcoin ETFs in the U.S.

The IRS proposed new tax reporting rules for crypto. We’re breaking down the 282-page report, and gauging the crypto industry’s reaction.

This week in numbers. The price of a pair of NFT-inspired Crocs, and other key stats to know.

MARKET UPDATE

Crypto rallies after Grayscale court victory lifts hopes for new bitcoin ETFs

After a sleepy summer with stubbornly stable prices and historically low volatility, crypto markets have woken up in a major way as autumn approaches. Earlier this month, markets tumbled – with nearly 12% of BTC’s market cap erased in a single night. This week markets flipped again, with a wide variety of cryptocurrencies (including BTC, ETH, and many altcoins) roaring back after digital asset manager Grayscale notched a legal victory that could have major ramifications for the crypto industry. Here’s what you need to know.

Grayscale’s legal victory could open the door for “spot” BTC ETFs

On Tuesday, the District of Columbia Court of Appeals sided with crypto-asset manager Grayscale in a lawsuit the firm filed against the Securities and Exchange Commission (SEC). At issue was Grayscale’s denied application to convert its Grayscale Bitcoin Trust product into a “spot” exchange-traded product (ETP), which would buy BTC and sell shares to customers via conventional brokerages. (Exchange-traded funds, or ETFs, are the most common type of ETP.)

Grayscale filed its application in 2022 after the SEC approved similar BTC futures ETFs, which buy BTC futures contracts (as opposed to BTC itself) as an indirect way of providing investors exposure to crypto. 

Ruling in favor of Grayscale on Tuesday, the court noted that the SEC “failed to adequately explain why it approved the listing of two bitcoin futures [ETFs] but not Grayscale’s proposed bitcoin [ETF]. In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.” 

Or as Fortune crypto editor Jeff Roberts tweeted: “In plain English, DC Court told [SEC Chair Gary] Gensler: “you say the price of bitcoin could be manipulated but the SEC approved a futures ETF — and there is a 99% correlation b/w spot and future prices.”

“We are reviewing the court’s decision to determine next steps,” said the SEC in a statement.

Why are spot BTC ETFs a big deal?

ETFs are a hugely popular asset class — with more than $10 trillion under management worldwide — that are similar in many ways to mutual funds. They generally track the price of an asset (like gold) or basket of assets (like the S&P 500). And as their name suggests, they trade on exchanges and can be bought and sold like stock via a traditional brokerage account. 

Spot BTC ETFs are widely seen as a potential way to increase mainstream adoption of crypto — and such products are currently being pursued by some of Wall Street’s biggest players. In June, crypto markets rallied after a wave of spot BTC ETF applications from asset-management giants including BlackRock and Fidelity.

What are experts saying about the ramifications of Grayscale’s victory?

Market watchers speaking to publications including Bloomberg, Fortune, and the Wall Street Journal generally indicated that the court’s ruling makes a positive outcome in Wall Street’s spot BTC applications more likely.

Some were strongly bullish. Speaking to CNBC, CoinRoutes CEO Dave Weisberger said: “It virtually guarantees they will approve BlackRock and Fidelity. Grayscale may need to refile, but they will almost certainly be approved as well.” 

Others were more measured in their optimism. “This is huge for crypto ETFs and for Grayscale,” said Bloomberg Intelligence analyst James Seyffart. “That said, this doesn’t mean unequivocally that we are immediately going to see GBTC convert into an ETF or get spot-Bitcoin ETF approvals. Though it makes it more likely.”

According to Bloomberg, the SEC is expected to begin responding to filings by early September — although given that the agency has the option to approve, deny, or delay, “analysts and industry observers anticipate the SEC to once again punt on making a decision.”

The bottom line…

Prior to the ruling, crypto markets had been mired in a down cycle, with BTC enduring weekly losses in eight of the last nine weeks as renewed interest-rate hike fears pressured markets. Facing those headwinds, crypto markets have been waiting for a catalyst — and while it’s too soon to say if this court decision will evolve into the news that helps drive the next cycle, at least some investors are betting that prices will rise: In the hours after the Grayscale decision, BTC futures were up by more than 6%. 

BRASS TAX

IRS’s crypto tax reporting proposal gets mixed reactions from Washington, crypto industry

Last Friday, the U.S. Treasury Department and the IRS issued a 282-page digital asset tax proposal that would fundamentally transform the tax reporting requirements for crypto — a move the government claims will generate $28 billion in revenue over a decade and that critics say could put undue pressure on an industry that is already battling regulatory overreach. 

The proposed regulations would clarify a last-minute crypto law that the Biden administration added to its sweeping 2021 Bipartisan Infrastructure Deal. The law had two major consequences: it instructed the IRS to define what a crypto “broker” is and asked the agency to ramp up tax reporting requirements from such brokers. Now, the public is invited to weigh in on the proposal, parts of which have been met with concern from many corners of the crypto ecosystem. Here’s what you need to know. 

Why does the IRS say it needs new crypto tax reporting rules?

  • Because crypto is still relatively new, the IRS says that current regulations  make it hard for the agency to know what it is owed and for consumers to know what they should be paying in taxes. That’s why the proposal aims to define who qualifies as a crypto “broker” and what information  around customer crypto related activity — like capital gains and losses — such brokers should report to both the IRS and customers.

  • The IRS has existing reporting rules for traditional-finance brokers, but there are several key differences when it comes to crypto brokers — one being the amount of information being requested. As Lawrence Zlatkin, Coinbase’s VP of tax, said in a statement, “The sheer magnitude of this data requirement would be hundreds of times more than the annual reported transactions of any major brokerage.”

Got it. So what are some of the specifics in the tax proposal?

  • Brokers would be defined as a broad category that includes centralized crypto trading platforms (like Coinbase) and decentralized crypto platforms that provide “facilitative services” — potentially ranging from decentralized exchanges and, in some cases, non-custodial wallets.

  • Notably, miners and validators/stakers would not automatically qualify as brokers and wouldn’t need to follow these same broker reporting rules.

  • Brokers would have a number of reporting requirements, including a new 1099 form that tracks gains and losses for an ultra-wide range of transactions including assets sold on exchanges, assets traded via DeFi, gas fees, NFT sales, and stablecoin transactions.

  • While the proposed rules address gain/loss information reporting, the IRS specifically did not address in the rules whether crypto is considered a security or commodity for tax purposes.

  • The proposed rules are also strictly for broker information reporting and do not change the need for taxpayers to continue tracking crypto-related gain/loss info themselves and reporting any taxes accurately to the IRS via their income tax return. 

  • A 60-day public commenting period ends on October 30. If finalized in its current form, the rules go into effect in 2026, for the 2025 tax year.

Some voices from Washington D.C. and the crypto community have expressed concerns about the proposal. What are they saying?  

  • Rep. Patrick McHenry (R–NC), Chair of the House Financial Services Committee, criticized the rules as overly broad, saying the proposal is part of an “ongoing attack on the digital asset ecosystem… Any proposed rule must be narrow, tailored, and clear.” McHenry is a key advocate behind the bipartisan stablecoin bill that recently advanced in Congress.

  • Miller Whitehouse-Levine, CEO of the DeFi Education fund, called the IRS’s report “a confusing and self-refuting proposal … [that] strains to find non-existent financial intermediaries in crypto — including DAOs and certain wallet providers — or to create them.”

  • Kristin Smith, CEO of the Blockchain Association advocacy group, acknowledged that “if done correctly, these rules could help … everyday crypto users … comply with tax laws.” But she also said “it’s important to remember that the crypto ecosystem is very different from that of traditional assets, so the rules must be tailored accordingly and not capture ecosystem participants that don’t have a pathway to compliance.”

NUMBERS TO KNOW

2 million

Approximate number of downloads logged by the blockchain-powered mobile game NFL Rivals since its soft launch in April. NFL Rivals incorporates "web3 digital ownership with an in-game utility that allows fans to own, collect, and trade playable digital assets," according to developer Mythical Games.

$99

Price for a pair of the Doodles x Crocs sandals that are available to Doodles NFT holders. In addition to the shoes, purchasers receive a “Crocs Box” digital collectible which includes two Doodles Wearables and early entry to Doodles’ Stoodio — a new platform for customizing Doodles characters.

95%

Approximate decrease in daily revenue earned by the buzzy web3 social app Friend.tech on Monday after peaking at around $840,000 per day a week earlier. Friend.tech is a decentralized social network that allows users to tokenize their accounts and then sell access to fans — early users included NBA players and crypto influencers. 

TOKEN TRIVIA

Which of the following is a taxable event?

A

Getting paid in crypto

B

Receiving an airdrop

C

Selling crypto for cash

D

All of the above

Find the answer below.

Trivia Answer

D

All of the above