Bitcoin gains as US court finds SEC was wrong to reject Grayscale's ETF application

The securities regulator's denial of Grayscale's proposal for a spot Bitcoin ETF was ‘arbitrary’, says ruling

Bitcoin gained more than 5 per cent on Tuesday after the US court ruling. Reuters
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Bitcoin rose to a two-week high on Tuesday after a US court ruled that the Securities and Exchange Commission (SEC) should have approved an application from Grayscale Investments to create a spot Bitcoin exchange-traded fund, in a landmark victory for the asset manager.

It was last up nearly 7 per cent at $27,910.

A panel of judges in the District of Columbia Court of Appeals in Washington said the securities regulator's denial of Grayscale's proposal was arbitrary and capricious because the SEC had failed to explain its different treatment of bitcoin futures ETFs and spot bitcoin ETFs.

What happened with Grayscale?

The SEC last year denied Grayscale's application to convert its spot Grayscale Bitcoin Trust into an ETF.

While the agency has rejected spot bitcoin ETFs, it has approved Bitcoin futures ETFs, which track agreements to buy or sell bitcoin at an agreed price.

Grayscale proposed using the same manipulation safeguards that were approved for those futures ETFs, but the SEC said that did not meet its bar.

Grayscale was just one of several asset managers, including Cathie Wood's ARK, Fidelity and Invesco, whose spot Bitcoin ETF applications the SEC rejected on investor protection grounds.

Unlike those other firms, Grayscale sued the SEC. Because the defendant is a regulator, the case went straight to the appeals court.

What was Grayscale’s argument?

Grayscale argued that the Bitcoin futures ETF surveillance arrangements should also be satisfactory for Grayscale's spot ETF, since both products rely on the bitcoin's underlying price.

Bitcoin futures ETFs track Bitcoin futures that trade on the Chicago Mercantile Exchange, the chief venue for those products.

The CME checks "futures market conditions and price movements on a real time and ongoing basis in order to detect and prevent price distortions, including price distortions caused by manipulative efforts", the SEC has said.

Grayscale's lead counsel Donald Verrilli Jr told the court in March that a spot bitcoin ETF would "better protect investors" because it would give them the benefit of CME oversight of the market. Currently, Americans mostly invest in Bitcoin via less well-established or unregulated exchanges.

However, the SEC says Grayscale lacks data to determine whether the CME futures surveillance agreement could also detect potential manipulation in the spot markets.

What happens now?

Both parties have 45 days to appeal the ruling, in which case it would either go to the US Supreme Court or an en banc panel review.

Grayscale's chief executive had said earlier he was prepared to appeal if the court ruled in the SEC's favour. It is unclear if the SEC would do likewise.

If Grayscale ultimately prevails and the SEC does not appeal, the court would specify how its decision should be executed.

That could include instructing the SEC to approve the application or to revisit Grayscale's application, in which case the SEC could still reject the proposal on other grounds.

If the SEC wins, Grayscale could refile its application, but to succeed it would need to address the agency's market manipulation concerns.

What would a Grayscale victory mean for other applications?

Several firms have this year filed spot Bitcoin ETFs for listing on Nasdaq or CBOE Global Markets, including BlackRock, the world's largest asset manager, Fidelity, WisdomTree, VanEck, Bitwise and Invesco.

Many have proposed working with Coinbase, the largest US-based cryptocurrency exchange, to police trading in the underlying Bbitcoin market. The SEC has formally acknowledged those applications and can take as long as 240 days to decide.

It is unclear what a win for Grayscale would mean for those applications but it could factor into the SEC's decisions on those proposals.

Updated: August 30, 2023, 11:27 AM