The United States Securities and Exchange Commission (SEC) has itself to blame for the latest setback to its crypto regulatory campaign. A US court has overturned an adverse ruling by the regulator for a spot market-based bitcoin ETF run by investment firm Grayscale. The recent ruling is potentially momentous as a whole series of clearances could also be due for index funds from large asset managers, that are intended to invest directly in the cryptocurrency.

Overall, the SEC has rejected more than 30 applications for registration of such products, consistently citing the low liquidity, high volatility, and susceptibility to manipulation of the underlying market. The issue at hand is that the regulatory authority had already granted approval for futures-based Bitcoin ETFs back in 2021, thus opening Pandora's box. This is because similar investment vehicles are subject to congruent regulation under US law – a principle that the judges in the Grayscale case have now also embraced.

Indeed, it's not entirely clear why futures-based ETFs should provide more investor protection than spot market vehicles. Certainly, major market makers operate on futures exchanges like the Chicago Mercantile Exchange, ensuring liquidity. However, Grayscale's argument, that the exchange rates used for Bitcoin futures rely on data from cryptocurrency exchanges and are thus directly influenced by fluctuations and manipulation attempts in the spot market, is compelling.

This isn't to imply that an approval for spot Bitcoin ETFs would be desirable. Yet, if the SEC wanted to genuinely uphold its position, it shouldn't have given the green light to futures vehicles either. One of the judges in the Grayscale case deems the regulator's approach as "arbitrary and capricious" – hitting the nail on the head. While the SEC might be pursuing lofty goals under its chairman Gary Gensler, it consistently forges ahead with overly ambitious regulatory initiatives or enforcement actions that appear hasty.

This pattern isn't solely limited to the cryptocurrency market. The SEC has initiated or even pushed through extensive reform initiatives for stock trading, money market funds, as well as the private equity and hedge fund industry. Nevertheless, faced with strong resistance from these respective sectors, it has repeatedly backpedaled or had to make compromises. When the regulatory authority, just as it has done with Bitcoin ETFs, undermines its own argumentation, it further trims its own claws – risking the transformation into an innocuously purring paper tiger.