On Tuesday, a three-judge panel for the U.S. Court of Appeals for the D.C. Circuit raised doubts over a decision by the Securities and Exchange Commission to deny a Bitcoin spot exchange-traded fund, or ETF.
Shortly after the hearing, which turned on a complaint by the crypto company Grayscale, shares of the company’s GBTC shares—which are backed by Bitcoin—surged more than 10% on a day when the broader market is down. By midday ET, GBTC shares fell slightly from their earlier high, trading around $12.50.
Grayscale, represented by former solicitor general Donald Verrilli Jr., argued that the SEC had been “arbitrary and capricious” in approving an ETF based on the futures market for Bitcoin, but then denying Grayscale’s ETF based on the spot market.
The SEC, represented by senior counsel Emily Parise, countered that the futures market was regulated by the Commodity Futures Trading Commission through a surveillance agreement with the Chicago Mercantile Exchange, while spot markets remain unregulated and are subject to fraud and manipulation.
The three judges for the court—Sri Srinivasan, Harry T. Edwards, and Neomi Rao—expressed skepticism toward the SEC position, seeming to side with Grayscale’s argument that the futures market relied on the spot market for its underlying pricing, and therefore fraud and manipulation would affect both. Even as Grayscale provided data that showed the two markets were 99.9% correlated, Parise said that it was not empirically sufficient.
“It seems there’s quite a bit of information on how these markets work together,” Rao noted to Parise. “The SEC has not offered any explanation that the petitioners are wrong.”
James Angel, a faculty member at Georgetown’s Psaros Center for Financial Markets and Policy specializing in market structure and financial regulation, told Fortune the judges seemed to understand Grayscale’s economic argument that the SEC accepted one product and arbitrarily rejected another.
Even so, the case will likely come down to the doctrine of Chevron deference, which entails courts giving agencies like the SEC latitude to interpret statutes related to their expertise. Even though the Supreme Court has recently reduced the amount of administrative deference, agencies such as the SEC generally have a wide remit to interpret statute—in this case, the Securities Exchange Act of 1934.
Even as the judges appeared unconvinced of the SEC’s arguments, Angel said that the outcome is still uncertain. “My crystal ball is cloudy,” he told Fortune.
There is also the question of what would happen if the judges side with Grayscale. Rao asked Parise if the SEC would go back on its approval of the Bitcoin futures ETF. Parise said she could not speak for the commission, but that it would have to “think about the issue anew.”
Grayscale, a subsidiary of crypto empire Digital Currency Group, currently operates the Grayscale Bitcoin Trust, a fund holding nearly $15 billion in assets. When it launched in 2013, it represented one of the first financial instruments for investors to get access to Bitcoin without buying it directly.
Although investors can buy shares of the trust, they cannot redeem them back into Bitcoin—a limitation that has caused the fund to trade at a significant discount to the price of its underlying Bitcoin. Verrilli argued that converting the trust to a spot-based ETF would unlock $4 billion in value.
“The court asked thoughtful, pointed questions about the inextricable link between Bitcoin spot markets and Bitcoin futures markets—the exact points that are the bedrock of the case to convert GBTC to an ETF,” a Grayscale spokesperson told Fortune. “We look forward to the court’s final decision, and strongly believe that American investors deserve to have equal access to the Bitcoin ETF product that best suits their needs.”
Given the recent torrent of enforcement actions by the SEC, a Grayscale win would set back Chair Gary Gensler’s crackdown against the crypto industry, although, as Parise alluded, it could also cause the agency to revisit its approval of a Bitcoin futures ETF. The approval of a Bitcoin spot ETF would open the market to new investors, likely causing the price of Bitcoin to rise.
Even with an uncertain outcome, the surge in GBTC’s share price indicated investors are optimistic that judges would side with Grayscale. A decision is expected by the end of the summer.
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