A federal appeals court ruled on Tuesday that the Securities and Exchange Commission should have accepted Grayscale Investments’ proposal to form a spot bitcoin exchange-traded fund, in a momentous victory for the asset manager that could pave the way for the first product of its kind.
A panel of judges in the District of Columbia Court of Appeals in Washington said the securities regulator’s denial of Grayscale’s proposal was arbitrary and capricious because the SEC failed to explain its different treatment between bitcoin futures ETFs and spot bitcoin ETFs.
The price of bitcoin, the world’s largest cryptocurrency, was last up 4.71% at $27,333 following the decision.
The ruling could be a boon for bitcoin, as a spot bitcoin ETF would provide investors the opportunity to gain exposure to the digital asset without having to purchase bitcoin via a retail exchange or hold the asset in a separate crypto wallet.
In a statement, a Grayscale spokeswoman said the decision “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.”
“The Grayscale team and our legal advisors are actively reviewing the details outlined in the Court’s opinion and will be pursuing next steps with the SEC,” the spokeswoman said.
An SEC spokesperson said the regulator is reviewing the court’s decision in order to determine next steps.
The SEC rejected Grayscale’s application for a spot bitcoin ETF in June 2022, arguing the proposal did not meet anti-fraud and investor protection standards. It cited the same reason in its denial of dozens of other applications for similar products, including those from Fidelity and VanEck.
Grayscale had argued that because the SEC previously approved certain surveillance agreements to prevent fraud in bitcoin futures-based ETFs, the same setup should also be satisfactory for Grayscale’s spot fund, since both spot and futures funds rely on bitcoin’s price.
The court said in its ruling that the SEC failed to explain why it disagreed with Grayscale’s assertion that the bitcoin spot and futures markets are 99.9% correlated.
“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,” the court said in its opinion, which was filed by Judge Neomi Rao of the District of Columbia Court of Appeals.
The ruling is the second major legal victory for the crypto industry in recent weeks, after the SEC was also dealt a loss in July when a judge ruled that Ripple Labs did not violate federal laws by selling its XRP token on public exchanges.
The SEC will have 45 days to appeal Tuesday’s ruling. If it chooses to appeal, the case would go either to the U.S. Supreme Court or an en banc panel review.
If the SEC chooses not to appeal, the court would issue a mandate specifying how its decision should be executed. That could include instructing the SEC to approve the application, or to revisit Grayscale’s application, in which case the SEC could still reject the proposal on other grounds.
It remains to be seen how the ruling might impact proposals submitted in June by BlackRock (BLK.N), the world’s largest asset manager, and several other firms to offer spot bitcoin ETFs. The SEC has yet to deliver a decision on those applications.