Grayscale CEO Michael Sonnenshein Courtesy of Grayscale
The U.S. Court of Appeals for the DC Circuit issued its opinion in Grayscale v. SEC on Tuesday, ruling that the agency was unreasonable to deny the crypto giant permission to launch a Bitcoin ETF.
The ruling, which came after the SEC rejected crypto giant Grayscale’s latest bid to launch a Bitcoin ETF last October, opens the door to a potentially huge amount of new capital flowing into crypto markets.
The court’s ruling turned on the SEC’s inconsistent of applications for Bitcoin futures ETFs, which it has approved in the past, and for regular ETPs or exchange traded products, which Grayscale had sought.
“The Commission failed to reasonably explain why it approved the listing of two bitcoin futures ETPs
but not Grayscale’s similar proposed bitcoin ETP. Without such an explanation, inconsistent treatment of similar products is arbitrary and capricious,” wrote Circuit Judge Neomi Rao.
The price of Bitcoin immediately soared after the the ruling, climbing over 5% in the minutes after the news broke.
The ruling has big implications for the crypt markets since, while retail consumers and hedge funds have invested in Bitcoin for more than a decade, pension funds and other big players have largely stayed on the sidelines. This in part because corporate by-laws restrict what they may invest in on behalf of their customers.
The introduction of a Bitcoin packaged in the familiar financial wrapper of an ETF is widely expected to wipe away such legal and reputational concerns among conservative investors, and lead to massive boost in liquidity for the crypto markets.
“This is 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,” said Grayscale in a statement.
The SEC did not immediately comment on the ruling or whether it would appeal.
The lawsuit over began last October when Grayscale sued the agency after it rejected the company’s most recent application to launch a Bitcoin ETF. Grayscale’s claim focused on the disparate treatment of ETFs that package Bitcoin futures contracts, which the agency has allowed since 2021, and ones for spot market Bitcoin, which it has repeatedly denied.
At a hearing in March, Grayscale argued the SEC’s purported justification for denying its application—that there was a risk the underlying Bitcoin market could be manipulated—was unreasonable since the same concerns could apply to the futures market.
In her opinion, Judge Rao agreed and focused in particular on the fact that there has been a 99.9% correlation between the Bitcoin future’s price and the Bitcoin spot price—and that Grayscale proposed to rely on an identical “surveillance” agreement as is being used to oversee the Bitcoin futures ETF. This implied that the SEC’s concern about manipulation was not reasonable.
“The Commission’s unexplained discounting of the obvious financial and mathematical relationship between the spot and futures markets falls short of the standard for reasoned decision making,” wrote Judge Rao.
The ruling does not mean the SEC has to immediately implement the ruling. While it could appeal the decision, it is also facing applications for Bitcoin ETFs from traditional financial firms like BlackRock and Fidelity, which makes it more likely the agency will simply accept the court ruling and approve applications in coming weeks.
Following the ruling, the price of other cryptocurrencies, including Ethereum, rose 5% or more.
