Appeals Court Smacks Down SEC In Bitcoin ETF Bid Case

Watershed Moment For Crypto Industry as Faithfuls Score Another Win In Against SEC

Grayscale secured a landmark win for the crypto industry and potentially open the door for its first U.S. spot bitcoin exchange-traded fund (ETF) after a federal court Tuesday sided with the world’s largest bitcoin trust and found that the Securities and Exchange Commission (SEC) must review its rejection of Grayscale Investments’ attempt to convert the Grayscale Bitcoin Trust (GBTC) into an ETF.

D.C. Circuit Court of Appeals sided with Grayscale in its year-long lawsuit against the SEC after the regulator agency denied the company’s application to convert its flagship bitcoin fund into an ETF that would be backed by bitcoin rather than bitcoin derivatives. After multiple delays from the SEC, the regulators in late June of 2022 ultimately rejected the application, claiming Grayscale’s failure to answer questions related to concerns about possible market manipulation and investor protections.

Grayscale sued the SEC in response last October, arguing the SEC decision given was “arbitrary” and cited the regulator’s prior approval of futures-based bitcoin ETFs. The SEC in October 2021 finally approved ProShares’ futures-based bitcoin ETF that tracked the bitcoin futures market to be traded on the NYSE under the ticker “BITO.”

The three-court panel — Judges Sri Srinivasan, Neomi Rao, and Harry Edwards of the District of Columbia Circuit Court of Appeals in Washington, D.C. agreed with the world’s largest bitcoin trust argument in finding the SEC’s reason for denying Grayscale Investments permission to launch a spot-bitcoin ETF to be “arbitrary and capricious.”

“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products. We therefore grant Grayscale’s petition and vacate the order,” the ruling read.

“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. Petitioning for review of the Commission’s denial order, Grayscale maintains its proposed bitcoin exchange-traded product is materially similar to the bitcoin futures exchange-traded products and should have been approved to trade on NYSE Arca. We agree,” the ruling added.

The ruling opinion specified that the issue with the SEC was its failure to properly explain its reasoning for rejection of the bitcoin fund while recently approving the trading of bitcoin futures funds, despite both assets being “closely correlated.”

“Grayscale has demonstrated its proposed bitcoin ETP is materially similar, across relevant regulatory factors, to the approved bitcoin futures ETPs,” the ruling read. “First, the underlying assets – bitcoin and bitcoin futures – are closely correlated. And second, the surveillance sharing agreements with the CME are identical and should have the same likelihood of detecting fraudulent or manipulative conduct in the market for bitcoin and bitcoin futures.”

“In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful,” the ruling noted.

“Grayscale shared enough arguments that its proposed ETF was similar to the recently approved Teucrium and Valkyrie bitcoin futures products, which warrants “the same regulatory treatment,” the ruling added, ordering the SEC to review Grayscale’s bid to convert its ETF application again.

Spot markets are where assets are traded through a traditional stock exchange for immediate delivery. With a spot bitcoin ETF, the bitcoin would be held by a brokerage and would allow investors to gain exposure to the world’s biggest cryptocurrency without having to own the coin themselves. By contrast, Bitcoin futures are traded on the CME and those who invest in a futures-based ETF would not be investing directly in Bitcoin. A futures contract is an agreement to buy or sell an asset at a future date at an agreed-upon price. A futures-based ETF tracks cash-settled futures contracts, not the price of the asset itself.

For more than two years, multiple brokerage firms have been applying for spot bitcoin ETFs with more than 30 proposals all receiving the rejection mark. Wall Street’s top cop in denying a spot-bitcoin ETF application from being approved in the past has always received the same explanation as its reason for denial: There’s not enough proof that bitcoin’s underlying spot markets couldn’t be manipulated.

In response to the ruling, the SEC said it would be reviewing the Appeals court’s decision to determine its next steps. The SEC has 2 options to halt issuing a potential spot bitcoin ETF for the time being — appeal the federal appeals court ruling or deny Grayscale application again, but this time citing a different justification. The latter would definitely invite another court challenge.

Grayscale cheered the court’s decision, calling the ruling “a monumental step forward for American investors, the Bitcoin ecosystem, and all those who have been advocating for Bitcoin exposure through the added protections of the ETF wrapper.”

Grayscale CEO Michael Sonnenshein echoed the company statement in a social media post

Bitcoin, along with other cryptocurrencies, and crypto-tied stocks prices spiked after the ruling was unveiled.

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Appeals Court Smacks Down SEC In Bitcoin ETF Bid Case

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