Court hands Grayscale win in long-running suit against SEC

August 31, 2023

By Sharan Kaur Phillora

In a significant legal victory for Grayscale Investments, a court has directed the U.S. Securities and Exchange Commission (SEC) to reevaluate the company’s application for a spot bitcoin exchange-traded fund (ETF). 

Here’s what we know:

The ruling could be a game-changer for the burgeoning cryptocurrency sector as it paves the way for other financial giants like BlackRock and Fidelity, who have similar pending applications.

According to CoinGecko, Bitcoin’s price reacted positively to the news, surging 5.4% to $27,450 as of 10:46 a.m. ET.

The court’s opinion focused on the SEC’s disparate treatment of spot bitcoin ETFs and bitcoin futures ETFs. Grayscale successfully argued that its proposed ETF was analogous to existing bitcoin futures ETFs concerning both the underlying assets and surveillance-sharing agreements. 

The court noted that Grayscale’s proposed fund had “the same likelihood of detecting fraudulent or manipulative conduct in the market for bitcoin and bitcoin futures.”

“The denial of Grayscale’s proposal was arbitrary and capricious because the Commission failed to explain its different treatment of similar products,” the court said. “We therefore grant Grayscale’s petition and vacate the order.”

The SEC now has 45 days to request an en banc hearing involving all three judges. After that period, the court will issue a final mandate outlining the next steps.

Jenn Rosenthal, Grayscale’s Head of Communications, called the decision monumental for American investors and the broader Bitcoin ecosystem.

“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 the Grayscale spokesperson.

Grayscale initially brought the lawsuit against the SEC for rejecting its plan to convert its flagship fund, GBTC, into a spot bitcoin ETF. The SEC has thus far approved only bitcoin futures ETFs, citing fraud and market manipulation concerns.

Nathan Geraci, president of advisory firm The ETF Store, mentioned that the SEC now has two likely options: either approve Grayscale’s conversion or deny it on other grounds. A third scenario, the closure of existing futures-based bitcoin ETFs, is unlikely, according to Geraci, especially since the SEC recently approved a new product, the Volatility Shares 2X Bitcoin Strategy ETF (BITX), which began trading in June.

The case sets a crucial precedent, with ripple effects likely to influence the SEC’s stance on future spot bitcoin ETF applications.

About the author

Sharan Kaur Phillora’s thirst for knowledge has led her to study many different subjects, including NFTs and Blockchain technology – two emerging technologies that will change how we interact with each other in the future. When she isn’t exploring a new idea or concept, she enjoys reading literary masterpieces.

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