In a significant development for the crypto industry, a federal appeals court has ruled that the SEC must rereview Grayscale’s application to convert its Bitcoin trust into an exchange-traded fund (ETF). This ruling undermines the SEC’s longstanding opposition to listed spot-market investments for bitcoin while allowing them for futures.
The court, presided over by Judge Neomi Rao, stated that the SEC’s denial of Grayscale’s proposal was “arbitrary and capricious.” The agency had failed to provide sufficient explanation for its different treatment of similar products. The court found that Grayscale’s application for a bitcoin ETF was materially similar to futures-based funds that the SEC had previously approved. The agency had not convinced the panel that the spot market for bitcoin was less safe for investors than futures.
Grayscale Investment had initially applied to convert its bitcoin trust into an ETF in October 2021, but the SEC denied the request, stating that the company had not implemented adequate protections against market manipulation. In June 2022, Grayscale filed an appeal with the federal appeals court, arguing that the SEC’s approval of similar futures-based ETFs was inconsistent and unfair.
While the court’s decision does not guarantee approval for Grayscale’s application, it does require the SEC to review it once again. However, crypto industry insiders see this as a significant step towards the eventual approval of a publicly-listed bitcoin ETF. Many believe that the approval of a spot bitcoin ETF will drive mainstream institutional adoption of the cryptocurrency.
Following the news of the court’s ruling, bitcoin and other major cryptocurrencies experienced a surge in value. CoinBase, listed as the custodian partner in multiple spot bitcoin ETF applications, saw its stock price increase by over 14%. In a written statement, a Grayscale spokeswoman described the court’s ruling as a “monumental step forward” for American investors and the bitcoin ecosystem. However, the SEC stated that it is reviewing the decision and determining its next steps.”
Crypto experts believe that the SEC’s options for further action are limited. Renato Mariotti, a former federal prosecutor, stated that the SEC has no other avenue to deny Grayscale’s application and changing their rationale would appear even more arbitrary. Some experts suggest that the SEC could accept the court’s decision and allow the spot bitcoin ETF while expressing their disagreement.
Grayscale’s bitcoin trust, known by its ticker symbol GBTC, was the first crypto product that investors could trade in their brokerage accounts to gain exposure to bitcoin. It has $16 billion in assets under management. Grayscale charges a 2% annual fee to investors, making it a profitable venture for its parent company, Digital Currency Group.
With this ruling, experts believe that it is highly likely that BlackRock and Fidelity, who have also applied for spot bitcoin ETFs, will receive SEC approval. Both companies applied following the SEC’s approval of ProShares’ futures-based bitcoin ETF in October 2021. Firms have been applying for spot bitcoin ETFs for over two years, but the SEC has rejected all proposals thus far.
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