Grayscale's court win against the SEC on a spot bitcoin ETF

On Tuesday, the US DC Court of Appeals gave a thumbs-up to Grayscale in its battle against the SEC.

Grayscale's court win against the SEC on a spot bitcoin ETF
A representation of virtual currency Bitcoin is seen in front of a stock graph in this illustration taken January 8, 2021. REUTERS/Dado Ruvic/File Photo

The backstory: The past few years have been a rollercoaster for crypto. To put it all in perspective, since reaching its peak in late 2021, the crypto market saw a loss of US$2 trillion last year. Fraud allegations and market manipulation shook things up, and US regulators tightened their grip on existing industry players.

But in the midst of this chaos, there's been a spark of interest in something called bitcoin exchange-traded funds (ETFs). This kind of ETF would be available on big stock exchanges and managed by brokers, and it tracks the underlying price of an asset – in this case, bitcoin. It could make it easier for traditional investors to dip their toes into the crypto world without actually owning crypto. So far, US regulators haven’t allowed this type of spot bitcoin ETF, although they have given the green light to bitcoin futures ETFs, which track agreements to buy or sell the asset at a pre-agreed price.

Enter Grayscale Investments, a heavyweight in the crypto scene, managing the world's biggest crypto fund. It wants to transform its flagship bitcoin fund into an ETF. But the US Securities and Exchange Commission (SEC) rejected its plans last year, saying it was too risky for investors. So, the firm took the SEC to court.

More recently: Things took a turn in March. During a hearing, the judges threw some questions at the SEC, seeming to lean towards Grayscale's point of view that both spot bitcoin and bitcoin futures markets shared similar risks of fraud and manipulation since they both rely on the same underlying pricing.

Some big names in the crypto world have also decided to jump into the bitcoin ETF game. In June, BlackRock took the lead and applied for a bitcoin ETF. Fidelity Investments, Invesco and WisdomTree also joined in by submitting their applications for the products.

The development: On Tuesday, the US DC Court of Appeals gave a thumbs-up to Grayscale in its battle against the SEC, bringing it closer to its spot bitcoin ETF goal. The court essentially said the SEC didn’t offer a good explanation for why it approved bitcoin futures ETFs but rejected Grayscale’s proposal. This could have a ripple effect for other big players like BlackRock and Fidelity, who are also eyeing the spot bitcoin ETF market.

Investors embraced the news with enthusiasm. The positive impact spread across the crypto space, boosting Grayscale Bitcoin Trust and other major cryptocurrencies like ether and bitcoin. Even Coinbase, which has plans for multiple bitcoin ETFs, saw its stocks soar by over 14% after the win.

Grayscale's spokesperson said it’s not just a win for bitcoin but a big step in investments in general. But the ETF isn’t a go just yet. The SEC has 45 days to ask the DC Court to reconsider, and if that doesn't pan out, the SEC has 90 days to explore the possibility of involving the Supreme Court.

Key comments:

“The Commission failed to adequately explain why it approved the listing of two bitcoin futures ETPs but not Grayscale’s proposed bitcoin ETP,” said the court, referring to exchange-traded products. “In the absence of a coherent explanation, this unlike regulatory treatment of like products is unlawful.”

“We are reviewing the court’s decision to determine next steps,” said the SEC  in a statement.

“The Grayscale team and our legal advisors are actively reviewing the details outlined in the Court’s opinion and will be pursuing next steps with the SEC. We will share more information as soon as practicable,” said Grayscale in a written statement.

“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” wrote Judge Neomi Rao in the court’s opinion.