The U.S. Court of Appeals for the D.C. 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 comes after the Securities and Exchange Commission rejected Grayscale’s latest bid to launch a Bitcoin ETF in 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 handling of applications for Bitcoin futures ETFs, which it had approved, 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 Judge Neomi Rao.
The SEC did not immediately comment on the ruling or say whether it would appeal.
Bitcoin immediately soared after the ruling, climbing over 5% in just minutes, as did the price of several other major cryptocurrencies, including Ethereum.
The ruling has big implications for crypto markets. 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 is in part because corporate bylaws restrict what they may invest in on behalf of their clients. 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 and lead to a massive liquidity boost.
“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,” Grayscale said in a statement.
Grayscale isn’t the only firm that stands to benefit. Earlier this year, the financial giants BlackRock and Fidelity also were among those seeking permission for a Bitcoin ETF. To be clear, the SEC isn’t now required to immediately implement the findings, but while the agency still could appeal, applications from the likes of BlackRock makes it more likely the SEC will simply accept the decision and approve applications in the coming weeks.
“Falls short of the standard”
The lawsuit began last October when Grayscale sued the SEC 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 had repeatedly denied.
At a hearing in March, Grayscale argued the SEC’s purported justification for denying its application—that the underlying Bitcoin market could be manipulated—was unreasonable since the same concerns could apply to the futures market.
Rao agreed, and in her opinion she focused in particular on the fact that there has been a 99.9% correlation between the Bitcoin futures 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,” Rao wrote, “falls short of the standard for reasoned decision making.”
