Key Takeaways
- • A three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ruled on August 29, 2023 that the SEC was wrong to reject Grayscale Investments' application for a spot bitcoin ETF, according to Reuters.
- • The court found the SEC failed to fully explain its reasoning and ordered it to review its decision; the ruling does not automatically approve the product.
- • The SEC has 45 days to appeal, and bitcoin was last up more than 6% at $27,858 following the news.
- • The ruling could set a precedent for pending spot bitcoin ETF applications from BlackRock, Fidelity, Invesco and others.
Summary
A federal appeals court ruled on Tuesday that the U.S. Securities and Exchange Commission was wrong to reject Grayscale Investments' application to create a spot bitcoin exchange-traded fund, according to Reuters. A three-judge panel of the District of Columbia Court of Appeals said the SEC failed to fully explain its reasoning when denying the product and directed the agency to review its decision. The ruling does not mean Grayscale's ETF is automatically approved, but it represents a significant advance for the decade-long industry effort to bring a bitcoin ETF to market.
The SEC rejected Grayscale's application in June 2022, arguing the proposal did not meet anti-fraud and investor protection standards, specifically the bar for preventing market manipulation. The same rationale was applied to dozens of other applications, including those from Fidelity and VanEck. Grayscale argued that because the SEC had previously approved surveillance agreements for bitcoin futures-based ETFs, the same arrangement should suffice for a spot fund, since both rely on bitcoin's price. The court said the SEC failed to explain why it disagreed with Grayscale's assertion that the spot and futures bitcoin markets are 99.9% correlated. In the opinion, filed by Judge Neomi Rao, the court stated that 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 decisionmaking."
Grayscale CEO Michael Sonnenshein called the decision a "historic milestone for American investors" in a statement, and a company spokeswoman said Grayscale would pursue "next steps with the SEC." An SEC spokesperson said the agency was reviewing the decision. The SEC has 45 days to appeal; if it does, the case could go to the U.S. Supreme Court or a review by the full D.C. appeals court. If it does not, the court would issue a mandate that could instruct the SEC to approve the application or to reconsider it, in which case the agency could still reject the proposal on other grounds.
The ruling is the second major legal win for the crypto industry in recent weeks, following a July decision in which a judge found Ripple Labs did not violate federal law by selling its XRP token on public exchanges; the SEC has said it plans to appeal that finding. Reuters noted that the implications for pending spot bitcoin ETF applications from BlackRock, Fidelity, Invesco and other asset managers remain unclear, as the SEC has not yet issued decisions on them. Ji Kim, general counsel and head of global policy at the Crypto Council for Innovation, said the ruling "sets a precedent for the broader crypto industry." Bitcoin was last up more than 6% at $27,858 following the news.
The SEC rejected Grayscale's application in June 2022, arguing the proposal did not meet anti-fraud and investor protection standards, specifically the bar for preventing market manipulation. The same rationale was applied to dozens of other applications, including those from Fidelity and VanEck. Grayscale argued that because the SEC had previously approved surveillance agreements for bitcoin futures-based ETFs, the same arrangement should suffice for a spot fund, since both rely on bitcoin's price. The court said the SEC failed to explain why it disagreed with Grayscale's assertion that the spot and futures bitcoin markets are 99.9% correlated. In the opinion, filed by Judge Neomi Rao, the court stated that 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 decisionmaking."
Grayscale CEO Michael Sonnenshein called the decision a "historic milestone for American investors" in a statement, and a company spokeswoman said Grayscale would pursue "next steps with the SEC." An SEC spokesperson said the agency was reviewing the decision. The SEC has 45 days to appeal; if it does, the case could go to the U.S. Supreme Court or a review by the full D.C. appeals court. If it does not, the court would issue a mandate that could instruct the SEC to approve the application or to reconsider it, in which case the agency could still reject the proposal on other grounds.
The ruling is the second major legal win for the crypto industry in recent weeks, following a July decision in which a judge found Ripple Labs did not violate federal law by selling its XRP token on public exchanges; the SEC has said it plans to appeal that finding. Reuters noted that the implications for pending spot bitcoin ETF applications from BlackRock, Fidelity, Invesco and other asset managers remain unclear, as the SEC has not yet issued decisions on them. Ji Kim, general counsel and head of global policy at the Crypto Council for Innovation, said the ruling "sets a precedent for the broader crypto industry." Bitcoin was last up more than 6% at $27,858 following the news.
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