Skip to content

Federal Appeals Court Rules in Favor of Grayscale's Bitcoin ETF Proposal

A U.S. federal appeals court has ruled that the SEC was wrong to deny Grayscale Investments' application for a spot bitcoin exchange-traded fund, marking a significant victory for the asset manager and the cryptocurrency industry.

Gary Gensler
Gary Gensler

Landmark Victory for Grayscale

The U.S. Securities and Exchange Commission (SEC) should have approved the application from Grayscale Investments to create a spot bitcoin exchange-traded fund (ETF), a federal appeals court ruled on Tuesday. This landmark victory for the asset manager 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 was arbitrary and capricious in denying the product because it failed to fully explain its reasoning.

Bitcoin Price Surges Following Decision

Following the decision, the price of Bitcoin, the world's largest cryptocurrency, increased by 4.71% to $27,333. A spot bitcoin ETF would track its underlying market price, giving investors exposure to the digital asset without the need to buy the currency. The SEC has denied all proposed bitcoin ETFs, including Grayscale's, stating they do not meet its bar for preventing market manipulation.

Grayscale and SEC Reviewing Decision

In response to the court's decision, a Grayscale spokeswoman stated that it was "a monumental step forward for American investors." Grayscale and its legal advisors are actively reviewing the details outlined in the court's opinion and will be pursuing the next steps with the SEC. An SEC spokesperson said the regulator was reviewing the court's decision to determine next steps.

Crypto Industry Hails Ruling

The cryptocurrency industry quickly hailed the ruling as a positive development. Several other asset managers, including BlackRock, Fidelity, and Invesco, have similar filings pending with the SEC for a spot bitcoin ETF. Ji Kim, general counsel and head of global policy at the Crypto Council for Innovation, said, "This ruling is not just about Grayscale or Bitcoin, it sets a precedent for the broader crypto industry."

Background of the Rejection

The SEC rejected Grayscale's application for a spot bitcoin ETF in June 2022, arguing that 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.

Court's Opinion on the Rejection

The court, in its ruling, stated 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 decision-making," the court said in its opinion, filed by Judge Neomi Rao of the District of Columbia Court of Appeals.

This ruling is the second major legal victory for the crypto industry in recent weeks, following a July ruling in a case brought by the SEC that Ripple Labs did not violate federal laws by selling its XRP token on public exchanges. The SEC has said it plans to appeal that finding. The SEC will have 45 days to appeal Tuesday's ruling. If it does so, the case would go either to the U.S. Supreme Court or an en banc panel review.

Next Steps and Impact on Other Proposals

If the SEC chooses not to appeal, the court would issue a mandate specifying how its decision should be executed. This could include instructing the SEC to approve the application or 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, 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.