In a monumental decision on August 29, 2023, the United States Court of Appeals for the District of Columbia Circuit overturned the Securities and Exchange Commission’s (SEC) rejection of Grayscale Investments LLC’s application to convert the Grayscale Bitcoin Trust into a spot Bitcoin exchange-traded fund (ETF). This victory marks a significant milestone for Grayscale and has far-reaching implications for future spot Bitcoin ETF applications.
Arbitrary Rejection by the SEC
Grayscale’s initial application to convert the Grayscale Bitcoin Trust into a spot Bitcoin ETF was summarily rejected by the SEC on June 29, 2022. The company argued that the SEC’s decision was “arbitrarily and capriciously” made, especially since it had previously approved Bitcoin futures ETFs. Grayscale contended that the SEC’s rejection of spot Bitcoin ETF applications constituted “unfair discrimination” and violated the Securities Exchange Act.
Upon the news of the court’s favorable ruling, Bitcoin (BTC) experienced a surge of 6%, only to slightly retract to around 5%. This demonstrates the market’s positive response to Grayscale’s legal triumph and the potential implications it holds for the future of spot Bitcoin ETFs.
At the heart of Grayscale’s argument was the SEC’s different treatment of spot and futures Bitcoin ETFs, despite their similar risks and pricing based on underlying spot markets. Grayscale pointed out that both types of ETFs are subject to price manipulation and fraud. However, the SEC contended that spot Bitcoin ETFs are more susceptible to such risks due to the lack of regulation in the spot market. In contrast, the SEC argued that the regulated Chicago Mercantile Exchange, where Bitcoin futures ETFs trade, has robust safeguards against manipulation and fraud.
Grayscale’s CEO Responds
Following the court’s ruling, Grayscale CEO Michael Sonnenshein expressed his gratitude to the firm’s investors for their unwavering support. In a tweet, he also mentioned that Grayscale’s legal team is currently reviewing the court’s opinion, indicating potential next steps in the legal process.
This decision by the court holds immense importance for aspiring issuers of spot Bitcoin ETFs in the United States. If Grayscale had not secured this victory, the firm could have pursued further legal options. They could have called for an “en banc” hearing, where all judges of the D.C. Circuit would weigh in on the case, or appealed the decision to the Supreme Court. However, with the court ruling in Grayscale’s favor, the company sees this as a substantial win. This favorable outcome also brightens the future for other spot Bitcoin ETF issuers in the United States.